Professor John Zietlow MBA 621 Spring 2006 Stock And Bond Valuation Chapter 4.
Copyright 2005 by Thomson Learning, Inc. SHORT-TERM FINANCIAL MANAGEMENT Terry S. Maness and John...
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Transcript of Copyright 2005 by Thomson Learning, Inc. SHORT-TERM FINANCIAL MANAGEMENT Terry S. Maness and John...
![Page 1: Copyright 2005 by Thomson Learning, Inc. SHORT-TERM FINANCIAL MANAGEMENT Terry S. Maness and John T. Zietlow SHORT-TERM FINANCIAL MANAGEMENT Terry S.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e495503460f94b3cf49/html5/thumbnails/1.jpg)
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
SHORT-TERM FINANCIAL MANAGEMENTSHORT-TERM FINANCIAL MANAGEMENT Terry S. Maness and John T. Zietlow Terry S. Maness and John T. Zietlow
Copyright Copyright 2005 Thomson Learning, Inc. 2005 Thomson Learning, Inc.
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ISBN: 0-324-20293-8; ISBN: 0-324-20293-8; Support Website: Support Website: http://www.swlearning.com/finance/maness/short-term3e/short-term3e.htmlhttp://www.swlearning.com/finance/maness/short-term3e/short-term3e.html
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Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Chapter 1Chapter 1The Role of Working CapitalThe Role of Working Capital
SalesSales
A /RA /R
CashCash
InvInv
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ObjectivesObjectives
View firm as a system of cash flowsView firm as a system of cash flows
How WC and depreciation create disparities How WC and depreciation create disparities between profit and cash flowbetween profit and cash flow
Management aspects of various WC accountsManagement aspects of various WC accounts
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The Cash Flow TimelineThe Cash Flow Timeline
OrderOrder Order Order Sale Sale Payment Sent Payment Sent CashCash PlacedPlaced Received Received ReceivedReceived Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >
Time ==>Time ==> Accounts Disbursement Accounts Disbursement
< Payable > < Float >< Payable > < Float > Invoice Received Payment Sent Invoice Received Payment Sent Cash DisbursedCash Disbursed
OrderOrder Order Order Sale Sale Payment Sent Payment Sent CashCash PlacedPlaced Received Received ReceivedReceived Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >
Time ==>Time ==> Accounts Disbursement Accounts Disbursement
< Payable > < Float >< Payable > < Float > Invoice Received Payment Sent Invoice Received Payment Sent Cash DisbursedCash Disbursed
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...in the beginning...in the beginning
Balance Sheet - June 1Balance Sheet - June 1
CashCash $1,000$1,000 DebtDebt $$ 500500 Common Stock 500Common Stock 500
TotalTotal $1,000$1,000 Total Total $1,000$1,000
Balance Sheet - June 1Balance Sheet - June 1
CashCash $1,000$1,000 DebtDebt $$ 500500 Common Stock 500Common Stock 500
TotalTotal $1,000$1,000 Total Total $1,000$1,000
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The Next Day, June 2The Next Day, June 2
Balance Sheet - June 2Balance Sheet - June 2Purchase Fixed Assets and InventoryPurchase Fixed Assets and Inventory
CashCash $ $ 400400 A/PA/P $ $ 300300InventoryInventory 300300 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common StockCommon Stock 500 500
TotalTotal $1,300$1,300 TotalTotal $1,300$1,300
Balance Sheet - June 2Balance Sheet - June 2Purchase Fixed Assets and InventoryPurchase Fixed Assets and Inventory
CashCash $ $ 400400 A/PA/P $ $ 300300InventoryInventory 300300 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common StockCommon Stock 500 500
TotalTotal $1,300$1,300 TotalTotal $1,300$1,300
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End of JuneEnd of June
Balance Sheet - June 30Balance Sheet - June 30
Sale of product, incur operating expenses,Sale of product, incur operating expenses, incur depreciation, and generate profitincur depreciation, and generate profit
CashCash $ $ 325325 A/PA/P $ 300$ 300A/RA/R 700700 AccrualsAccruals 200200InventoryInventory 0 0 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common Stock Common Stock 500 500(Accum Depr) (Accum Depr) (100)(100) Retained Earnings Retained Earnings 25 25TotalTotal $1,525$1,525 TotalTotal $1,525$1,525
Balance Sheet - June 30Balance Sheet - June 30
Sale of product, incur operating expenses,Sale of product, incur operating expenses, incur depreciation, and generate profitincur depreciation, and generate profit
CashCash $ $ 325325 A/PA/P $ 300$ 300A/RA/R 700700 AccrualsAccruals 200200InventoryInventory 0 0 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common Stock Common Stock 500 500(Accum Depr) (Accum Depr) (100)(100) Retained Earnings Retained Earnings 25 25TotalTotal $1,525$1,525 TotalTotal $1,525$1,525
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July 1July 1
Balance Sheet - July 1Balance Sheet - July 1
Pay operating accruals with cashPay operating accruals with cash
CashCash $ $ 125125 A/PA/P $ 300$ 300A/RA/R 700 700 AccrualsAccruals 0 0InventoryInventory 0 0 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common Stock Common Stock 500 500(Accum Depr) (100)(Accum Depr) (100) Retained Earnings 25Retained Earnings 25TotalTotal $1,325$1,325 TotalTotal $1,325$1,325
Balance Sheet - July 1Balance Sheet - July 1
Pay operating accruals with cashPay operating accruals with cash
CashCash $ $ 125125 A/PA/P $ 300$ 300A/RA/R 700 700 AccrualsAccruals 0 0InventoryInventory 0 0 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common Stock Common Stock 500 500(Accum Depr) (100)(Accum Depr) (100) Retained Earnings 25Retained Earnings 25TotalTotal $1,325$1,325 TotalTotal $1,325$1,325
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July 15July 15
Balance Sheet - July 15Balance Sheet - July 15
Pay payables with cashPay payables with cash
CashCash $ $ ( 175)( 175) A/PA/P $ $ 0 0A/RA/R 700 700 AccrualsAccruals 0 0InventoryInventory 0 0 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common Stock Common Stock 500 500(Accum Depr) (100)(Accum Depr) (100) Retained Earnings 25Retained Earnings 25TotalTotal $1,025$1,025 TotalTotal $1,025$1,025
Balance Sheet - July 15Balance Sheet - July 15
Pay payables with cashPay payables with cash
CashCash $ $ ( 175)( 175) A/PA/P $ $ 0 0A/RA/R 700 700 AccrualsAccruals 0 0InventoryInventory 0 0 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common Stock Common Stock 500 500(Accum Depr) (100)(Accum Depr) (100) Retained Earnings 25Retained Earnings 25TotalTotal $1,025$1,025 TotalTotal $1,025$1,025
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July 31July 31
Balance Sheet - July 31Balance Sheet - July 31
Collect accounts receivableCollect accounts receivable
CashCash $ $ 525 525 A/PA/P $ $ 00A/RA/R 00 AccrualsAccruals 0 0InventoryInventory 0 0 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common Stock Common Stock 500 500(Accum Depr) (100)(Accum Depr) (100) Retained Earnings 25Retained Earnings 25TotalTotal $1,025$1,025 TotalTotal $1,025$1,025
Balance Sheet - July 31Balance Sheet - July 31
Collect accounts receivableCollect accounts receivable
CashCash $ $ 525 525 A/PA/P $ $ 00A/RA/R 00 AccrualsAccruals 0 0InventoryInventory 0 0 Debt Debt 500 500Fixed AssetsFixed Assets 600 600 Common Stock Common Stock 500 500(Accum Depr) (100)(Accum Depr) (100) Retained Earnings 25Retained Earnings 25TotalTotal $1,025$1,025 TotalTotal $1,025$1,025
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Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Profit versus Cash FlowProfit versus Cash Flow
QuestionQuestion: Why did the firm end up with $125 in : Why did the firm end up with $125 in additional cash while earning a profit of $25?additional cash while earning a profit of $25?
Answer: Some expenses are not cash expenses.Answer: Some expenses are not cash expenses.
QuestionQuestion: Why did the firm run out of cash during : Why did the firm run out of cash during its operating cycle?its operating cycle?
Answer: The cash deficit was due to the differences Answer: The cash deficit was due to the differences between the timing of cash disbursements and cash between the timing of cash disbursements and cash receipts.receipts.
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Important PointsImportant Points
#1: The firm must manage its cost structure to #1: The firm must manage its cost structure to generate a profitgenerate a profit
#2: WC accounts must be managed so that #2: WC accounts must be managed so that liquidity is maintained.liquidity is maintained.
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Relationship Between Accrual Relationship Between Accrual Income and Cash FlowIncome and Cash Flow
Income StatementIncome Statement Adjustment AccountAdjustment Account Cash Flow AccountCash Flow Account
SalesSales - Change in accounts receivable- Change in accounts receivable = Cash collected= Cash collected
Cost of goods soldCost of goods sold - Change in accounts payable- Change in accounts payable+ Change in inventory+ Change in inventory = Cash paid to suppliers= Cash paid to suppliers
Operating expensesOperating expenses - Change in operating accruals- Change in operating accruals- Depreciation- Depreciation = Cash paid for = Cash paid for
operating expensesoperating expenses
InterestInterest - Change in accrued interest- Change in accrued interest = Cash paid to creditors= Cash paid to creditors
TaxesTaxes - Change in accrued taxes- Change in accrued taxes- Change in deferred taxes- Change in deferred taxes = Cash paid for taxes= Cash paid for taxes
__________________________________ ______________________________________Net ProfitNet Profit Operating Cash FlowOperating Cash Flow
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Managing the Cash CycleManaging the Cash Cycle
Managing InventoryManaging Inventory
Managing ReceivablesManaging Receivables
Managing PayablesManaging Payables
Electronic CommerceElectronic Commerce
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Managing InventoryManaging Inventory
JITJIT
Trade-offs between:Trade-offs between:
– stock-out costsstock-out costs
– cost of excess inventorycost of excess inventory
– ordering costsordering costs
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Managing ReceivablesManaging Receivables
Who should receive credit and how much?Who should receive credit and how much?
Credit termsCredit terms
Monitoring the outstanding balanceMonitoring the outstanding balance
Speeding up the receipt of payments through Speeding up the receipt of payments through lockboxeslockboxes
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Managing PayablesManaging Payables
Search for terms that match with cash receiptsSearch for terms that match with cash receipts
Timing of paymentTiming of payment
Controlled disbursementControlled disbursement
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Electronic CommerceElectronic Commerce
Revolutionizing management of cash cycleRevolutionizing management of cash cycle
Proprietary systemsProprietary systems
Impact of InternetImpact of Internet
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How Much WC is EnoughHow Much WC is Enough
One viewOne view– optimal level is zerooptimal level is zero
– WC is an idle resourceWC is an idle resource
– Provides little valueProvides little value
How much in resources to commit?How much in resources to commit?– Why inventory?Why inventory?
– Why receivables and payables?Why receivables and payables?
– Why short-term investments?Why short-term investments? Chrysler’s $5 billion cushion of investmentsChrysler’s $5 billion cushion of investments
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How Management of Working How Management of Working Capital is ChangingCapital is Changing
Exhibit 1-6Working Capital Requirements as a Percent of Sales
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
1994 1995 1996 1997 1998 1999 2000 2001 2002
Years
Per
cent
of S
ales
Dell
Apple
Compaq
Gateway
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SummarySummary
Firm must operate at a profitable level.Firm must operate at a profitable level.
A profitable firm may still struggle financially.A profitable firm may still struggle financially.
Working capital soaks up cash flow and may cause Working capital soaks up cash flow and may cause an otherwise profitable firm to fail.an otherwise profitable firm to fail.
A successful firm’s operation is managed from a A successful firm’s operation is managed from a – profit, and a profit, and a
– cash flow perspective.cash flow perspective.