Professional Documents
Culture Documents
Sixth Edition
Slides by
Matthew Will
Irwin/McGraw Hill
Chapter 29
29- 2
Topics Covered
Working Capital
Links Between Long-Term and Short-Term
Financing
Tracing Changes in Cash and Working Capital
Cash Budgeting
A Short-Term Financing Plan
Irwin/McGraw Hill
29- 3
Working Capital
Net Working Capital - Current assets minus current
liabilities. Often called working capital.
Cash Conversion Cycle - Period between firms
payment for materials and collection on its sales.
Carrying Costs - Costs of maintaining current assets,
including opportunity cost of capital.
Shortage Costs - Costs incurred from shortages in
current assets.
Irwin/McGraw Hill
29- 4
A
B
C
Cumulative
capital requirement
Year 1
Year 2
Time
29- 5
Working Capital
Simple Cycle of operations
Cash
Irwin/McGraw Hill
29- 6
Working Capital
Simple Cycle of operations
Cash
Raw materials
inventory
Irwin/McGraw Hill
29- 7
Working Capital
Simple Cycle of operations
Cash
Raw materials
inventory
Finished goods
inventory
Irwin/McGraw Hill
29- 8
Working Capital
Simple Cycle of operations
Cash
Raw materials
inventory
Receivables
Finished goods
inventory
Irwin/McGraw Hill
29- 9
Working Capital
Simple Cycle of operations
Cash
Raw materials
inventory
Receivables
Finished goods
inventory
Irwin/McGraw Hill
29- 10
Assets
1998
1999
4
4
5
5
Inventory
26
25
Accts Recv
Total Curr Assets
25
55
30
65
Gross investment
56
70
less Depr
Net Fixed Assets
16
40
20
50
95
115
owner' s equity
Current Assets
Cash
Mark Securities
1999
20
27
25
27
5
65
12
76
95
115
Accts Payable
Fixed Assets
Total Assets
Irwin/McGraw Hill
29- 11
Irwin/McGraw Hill
$350
321
4
Assume
dividend = $1 mil
R.E.=$11 mil
25
1
Pretax income
24
. Tax at 50%
12
Net Income
$12
29- 12
Irwin/McGraw Hill
Sources
Issued long term debt
7
Reduced inventories
1
Increased accounts payable
7
Cash from operations
Net income
12
Depreciation
4
Total Sources
$31
Uses
Repaid short term bank loan
5
Invested in fixed assets
14
Purchased marketable securities
5
Increased accounts receivable
5
Dividend
1
Total Uses
$30
Increase in cash balance
$1
29- 13
Irwin/McGraw Hill
29- 14
Cash Budgeting
Steps to preparing a cash budget
Step 1 - Forecast the sources of cash.
Step 2 - Forecast uses of cash.
Step 3 - Calculate whether the firm is facing a cash
shortage or surplus.
Irwin/McGraw Hill
29- 15
Cash Budgeting
Example - Dynamic Mattress Company
Dynamic forecasted sources of cash
Quarter
Sales, $mil
1st
2nd
3rd
4th
Irwin/McGraw Hill
29- 16
Cash Budgeting
Example - Dynamic Mattress Company
Dynamic collections on AR
Qtr
1st
30.0
87.5
1. Beginning receivables
2. Sales
3. Collections
. Sales in current Qtr (80%)
70
. Sales in previous Qtr (20%)
15.0
Total collections
85.0
4. Receivables at end of period
. (4 = 1 + 2 - 3)
$32.5
Irwin/McGraw Hill
2nd
3rd
4th
32.5
30.7
38.2
78.5 116.0 131.0
62.8
17.5
80.3
92.8
15.7
108.5
104.8
23.2
128.0
$30.7
$38.2
$41.2
29- 17
Cash Budgeting
Example - Dynamic Mattress Company
Dynamic forecasted uses of cash
Payment of accounts payable
Labor, administration, and other expenses
Capital expenditures
Taxes, interest, and dividend payments
Irwin/McGraw Hill
29- 18
Cash Budgeting
Example - Dynamic Mattress Company
Dynamic
cash budget
Qtr
1st
2nd
3rd
4th
85.0
80.3
108.5
128.0
0.0
0.0
12.5
0.0
85.0
80.3
121.0
128.0
payment of AP
65.0
60.0
55.0
50.0
30.0
30.0
30.0
30.0
capital expenditures
32.5
1.3
5.5
8.0
4.0
4.0
4.5
5.0
131.5
95.3
95.0
93.0
$46.5
$15.0
$26.0
$35.0
Sources of cash
collections on AR
other
Total Sources
Uses of cash
Irwin/McGraw Hill
29- 19
Cash Budgeting
Example - Dynamic Mattress Company
Dynamic short term financing requirements
Cash at start of period
- 41.5
- 56.5
- 30.5
+ 35
- 46.5 - 15
+ 26
- 41.5 - 56.5
- 30.5
+ 4.5
$35.5
- $.5
$46.5 $61.5
29- 20
Irwin/McGraw Hill
29- 21
Example Dynamic
Mattress
CompanyFinancing Plan
Irwin/McGraw Hill
1st
New borrowing
1. Line of credit
2. Stretching payables
3. Total
Repayments
4. Line of credit
5. Stetched payables
6. Total
7. Net new borrowing
8. Plus securities sold
9. Less securities bought
10. Total cash raised
Interest payments:
11. Line of credit
12. Stretching payables
13. Less interest on securities
14. Net interest paid
15. Funds for Compensating balances
16. Cash required for operations
17. Total cash required
2nd
3rd
4th
41.0
3.6
44.6
0.0
20.0
20.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
44.6
5.0
0.0
49.6
0.0
3.6
3.6
16.4
0.0
0.0
16.4
4.8
20.0
24.8
-24.8
0.0
0.0
-24.8
36.2
0.0
36.2
-36.2
0.0
0.0
-36.2
0.0
0.0
-0.1
-0.1
3.2
46.5
49.6
1.2
0.2
0.0
1.4
0.0
15.0
16.4
1.2
1.0
0.0
2.2
-1.0
0.3
-24.8
1.0
0.0
0.0
1.0
-2.2
-35.0
-36.2