Essentials of Corporate Finance


Example: Cash Budget – Cash Collections



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Ross FCF 10Ce Ch18
Ross FCF 10Ce Ch18

Example: Cash Budget – Cash Collections

  • ACP = 30 days, this implies that 2/3 of sales are collected in the quarter made and the remaining 1/3 are collected the following quarter
  • Beginning receivables of $250 will be collected in the first quarter
  • Q1
  • Q2
  • Q3
  • Q4
  • 250
  • 167
  • 200
  • 217
  • Sales
  • 500
  • 600
  • 650
  • 800
  • Cash Collections
  • 583
  • 567
  • 633
  • 750
  • Ending Receivables
  • 167
  • 200
  • 217
  • 267
  • 18-

Example: Cash Budget – Cash Disbursements

  • Payables period is 45 days, so half of the purchases will be paid for each quarter and the remaining will be paid the following quarter
  • Beginning payables = $125
  • Q1
  • Q2
  • Q3
  • Q4
  • Payment of accounts
  • 275
  • 438
  • 362
  • 338
  • Wages, taxes and other expenses
  • 125
  • 150
  • 163
  • 200
  • 200
  • Interest and dividend payments
  • 50
  • 50
  • 50
  • 50
  • 450
  • 838
  • 575
  • 588
  • 18-

Example: Cash Budget – Net Cash Flow and Cash Balance

  • Q1
  • Q2
  • Q3
  • Q4
  • Total cash collections
  • 583
  • 567
  • 633
  • 750
  • Total cash disbursements
  • 450
  • 838
  • 575
  • 588
  • Net cash inflow
  • 133
  • -271
  • 58
  • 162
  • Beginning Cash Balance
  • 100
  • 233
  • -38
  • 20
  • Net cash inflow
  • 133
  • -271
  • 58
  • 162
  • 233
  • -38
  • 20
  • 182
  • Minimum cash balance
  • -50
  • -50
  • -50
  • -50
  • Cumulative surplus (deficit)
  • 183
  • -88
  • -30
  • 132
  • 18-

Short-Term Financial Plan

  • 18-
  • Q1
  • Q2
  • Q3
  • Q4
  • Beginning cash balance
  • 100
  • 233
  • 50
  • 50
  • Net cash inflow
  • 133
  • -271
  • 58
  • 162
  • New short-term borrowing
  • 88
  • 3
  • 1
  • Short-term borrowing repaid
  • 55
  • 33
  • Ending cash balance
  • 233
  • 50
  • 50
  • 178
  • Minimum cash balance
  • -50
  • -50
  • -50
  • -50
  • Cumulative surplus (deficit)
  • 183
  • 0
  • 0
  • 128
  • Beginning short-term debt
  • 0
  • 88
  • 33
  • 0
  • 88
  • -55
  • -33
  • Ending short-term debt
  • 0
  • 88
  • 33
  • 0

Short-Term Borrowing

  • Operating Loans
    • Committed vs. non-committed
  • Letter of credit
  • Accounts receivable financing
      • Covenants
  • Factoring
  • Securitizing Receivables
  • Inventory Loans
  • Trade Credit
  • Money Market Financing
  • 18-

Example: Compensating Balance

  • We have a $500,000 operating loan with a 15% compensating balance requirement. The quoted interest rate is 9%. We need to borrow $150,000 for inventory for one year.
    • How much do we need to borrow?
      • 150,000/(1-.15) = 176,471
    • What interest rate are we effectively paying?
      • Interest paid = 176,471(.09) = 15,882
      • Effective rate = 15,882/150,000 = .1059 or 10.59%
  • 18-

Example: Factoring

  • Last year your company had average accounts receivable of $2 million. Credit sales were $24 million. You factor receivables by discounting them 2%. What is the effective rate of interest?
    • Receivables turnover = 24/2 = 12 times
    • Average collection period = 365/12 = 30.4 days
    • APR = 12(.02/.98) = .2449 or 24.49%
    • EAR = (1+.02/.98)12 – 1 = .2743 or 27.43%
  • 18-

Quick Quiz

  • How do you compute the operating cycle and the cash cycle?
  • What are the differences between a flexible short-term financing policy and a restrictive one? What are the pros and cons of each?
  • What are the key components of a cash budget?
  • What are the major forms of short-term borrowing?
  • 18-

Summary

  • Short-term finance involves short-lived assets and liabilities.
  • Current assets and current liabilities arise in the short-term operating activities and the cash cycle of the firm
  • Managing short-term cash flows finding the optimal trade-off between carrying costs and shortage costs
  • Cash budgets are used to identify short-term financial needs in advance
  • The firm can then finance the shortfall
  • 18-

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