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FOW 11_Chapter 26 (1)

Uploaded by

tranthithuthuy.study
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 26

CORPORATE

FINANCE
Session 6

Captain Minh Thành


Captain Gia Bửu
Captain Trúc Hạ
Flights of Wisdom Season 11
CORPORATE FINANCE - SESSION 4

CHAPTER 26:
Short-term financing &
Working Capital Management
Part 1
Tracing Cash &
Net Working Capital (NWC)
Net Working Capital (NWC)
Working capital, also called net working capital (NWC),
represents the difference between a company’s current asset and
current liabilities

NWC = Current assets - Current liabilities


Net Working Capital (NWC)
NWC = Current assets - Current liabilities

Current assets are cash and other assets that are expected to convert to cash
within one year

Four of the most important current asset items found in balance sheet:
Cash and cash equivalents
Marketable securities
Accounts receivable
Inventory
Net Working Capital (NWC)
NWC = Current assets - Current liabilities

Current liabilities are obligations that are expected to require cash payment
within one year

Three major current liabilities are:


Accounts payable
Expenses payable (including accrued wages and taxes)
Notes payable
Net Working Capital (NWC)

Total Assets = Liabilities + Equity


Current Assets + Fixed Assets = Current Liabilities + Long-term Debt + Equity
Current Assets - Current Liabilties + Fixed Assets = Long-term Debt + Equity

Net Working Capital + Fixed Assets = Long-term Debt + Equity

Also:
Net Working Capital = (Cash + Other Current Assets) - Current Liabilities
(Cash + Other Current Assets) - Current Liabilities + Fixed Assets = Long-term Debt + Equity
Cash = Long-term Debt + Equity + Current Liabilities - Other (non-cash) Current Assets - Fixed Assets
Tracing Cash
Cash = Long-term Debt + Equity + Current Asset - Other (non-cash) Current Assets - Fixed Assets

Sources of cash always involve increasing a liability (or equity) account or decreasing an asset account
Uses of cash involve decreasing a liability by paying it off or increasing assets by purchasing something
Exercises
Indicate the impact of the following corporate actions on cash, sung the letter
I for an increase, D for a decrease, or N when no change occurs
a) a dividend is paid with funds received from a sale of debt
b) Real estate is purchased and paid for with short-term debt
c) Inventory is bought on credit
d) A short-term bank loan is repaid
e) Next year’s taxes are repaid
f) Preferref stock is redeemed
g) Sales are made on credit
h) Interest on long-term debt is paid
i) Payments for previous sales are collected
j) The accounts payable balance is reduced
Part 2
The Operating Cycle &
The Cash Cycle
The Operating Cycle
The product begins life as inventory, it is converted to a receivable when it is sold, and it is finally
converted to cash when we collect from sale

Operating cycle

Operating cycle: The average length of time between when a firm originally purchases its
inventory and when it receives the cash back from selling its product.

Operating cycle = Inventory period + Accounts receivable period


The Operating Cycle

Inventory period
Inventory period: The time the firm takes to acquire and sell the inventory

Accounts receivable period


Accounts receivable period: The time the firm takes to collect on the sale
The Cash Cycle

Accounts payable period Cash cycle

Accounts payable period: The time the firm takes to acquire and pay for inventory
We spend cash on Day 30, but we don‘t collect until Day 105
=> We have to arrange finance the $1000 for 105 - 30 = 75 days
=> Cash Cycle

Cash cycle = Operating cycle - Account payable period


The Operating and The Cash Cycle

The need for short-term financial management is suggested by the gap between the cash
inflows and the cash outflows.
Borrowing or by holding a liquidity reserve in the form of cash or marketable securities
Changing the inventory, receivable, and payable periods.
Calculating The Operating Cycle
Operating cycle = Inventory period + Accounts receivable period
Calculating The Cash Cycle
Cash cycle = Operating cycle - Account payable period
Exercise

Calculate the operating cycle and the cash cycle


Part 3
Cash Budgeting
Cash budgeting
The cash budget is a primary tool of short-term financial planning
Idea: Record the estimates of cash inflows and cash outflows
Purpose: to identify short-term financial needs
-> Determine the require borrowing for the short-term
Cash budgeting
Example: Cash inflows
Fun Toys sells to department stores on credit and sales do not generate cash immediately.
(Cash comes later from collections on accounts receivable).
- Fun Toys has a 90-day collection period and 100% of sales are collected the following
quarter:
Collections = Last quarter’s sales
Accounts receivable at end of last quarter = Last quarter’s sales
- Assume that sales in the fourth quarter of the previous fiscal year were $100 million
→ Accounts receivable at the end of the fourth quarter of the previous fiscal year = $100 million
→ Collections in the first quarter of the current fiscal year = $100 million
Cash budgeting

Collections in the first quarter of the current fiscal year = $100 million
Cash budgeting
The Morning Jolt Coffee Company has projected the following quarterly sales
amounts for the coming year:

a) Accounts receivable at the beginning of the year are $335. The company has a 45-day
collection period. Calculate cash collections in each of the four quarters by completing the
following
Cash budgeting
Cash budgeting

Example: Calculate outflows


- Metallica Corporation's purchases from suppliers in a quarter are equal to 75% of the
next quarter's forecast sales. Next forcast sales for quarter 1 next year is 1,950.
- The payables period is 60 days.
- Wages, taxes, and other expenses are 20 percent of sales, and interest and dividends
are $110 per quarter.
Cash budgeting
Example: Calculate outflows
- Metallica Corporation's purchases from suppliers in a quarter are equal to 75% of the next
quarter's forecast sales. Next forcast sales for quarter 1 next year is 1,950.
- The payables period is 60 days.
- Wages, taxes, and other expenses are 20 percent of sales, and interest and dividends are $110 per
quarter.
Cash budgeting
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:

Sales for the 1st quarter of the year after this one are projected at $180 million. Accounts receivable at the beginning of the year were
$71 million. Wildcat has a 45-day collection period.
Wildcat’s purchases from suppliers in a quarter are equal to 45 percent of the next quarter’s forecast sales, and suppliers are normally paid
in 36 days. Wages, taxes, and other expenses run about 25 percent of sales. Interest and dividends are $14 million per quarter.
Wildcat plans a major capital outlay in the second quarter of $85 million. Finally, the company started the year with a $54 million cash
balance and wishes to maintain a $30 million minimum balance.

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