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Chapter 18 - Short-Term Finance and Planning
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Chapter 18
SHORT-TERM FINANCE AND PLANNING
CHAPTER WEB SITES
Section
Web Address
CHAPTER ORGANIZATION
18.2 The Operating Cycle and the Cash Cycle
18.3 Some Aspects of Short-Term Financial Policy
18.4 The Cash Budget
18.5 Short-Term Borrowing
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ANNOTATED CHAPTER OUTLINE
Lecture Tip: For some reason, many students (and some faculty)
18.1 Tracing Cash and Net Working Capital
Defining Cash in Terms of Other Elements
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Uses of Cash (Activities that decrease cash)
Lecture Tip: Concept question 18.1b asks students to consider
whether net working capital always increases when cash
18.2 The Operating Cycle and the Cash Cycle
A. Defining the Operating and Cash Cycles
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The accounts receivable period (average collection period) is
Lecture Tip: Students should recognize that a company would
prefer to take as long as possible before paying bills. You might
C. Calculating the Operating and Cash Cycles
Lecture Tip: In this chapter, we use average values of inventory,
accounts receivable, and accounts payable to compute values of
inventory turnover, accounts receivable turnover and accounts
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Consider this example (similar to the one in the book):
Item
Beginning
Ending
Average
D. Interpreting the Cash Cycle
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Real-World Tip: This discussion suggests that, depending on
18.3 Some Aspects of Short-Term Financial Policy
A. The Size of the Firm’s Investment in Current Assets
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Carrying costs – costs that increase with investment in current
assets
Lecture Tip: The just-in-time inventory system is designed to
reduce the inventory period. In essence, companies pay their
B. Alternative Financing Policies for Current Assets
Ideally, we could always finance short-term assets with short-term
debt and long-term assets with long-term debt and equity.
However, this is not always feasible.
Lecture Tip: Some students tend to think permanent assets consist
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C. Which Financing Policy is Best?
Things to consider:
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Lecture Tip: Personal financial situations provide ample examples
D. Current Assets and Liabilities in Practice
18.4 The Cash Budget
A. Sales and Cash Collections
B. Cash Outflows
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C. The Cash Balance
18.5 Short-Term Borrowing
A. Unsecured Loans
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Lecture Tip: Trade credit represents another source of unsecured
financing. However, the cost of this form of borrowing is largely
B. Secured Loans
Accounts Receivable Financing
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Lecture Tip: Inventory needs to be non-perishable, marketable,
Real-World Tip: An interesting discussion of inventory financing
is the story of Tino De Angelis, who has come to be known as the
Unfortunately, Mr. De Angelis’ business acumen was greatly
C. Other Sources
Lecture Tip: In Corporate Liquidity, by Kenneth Parkinson and
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18.6 A Short-Term Financial Plan
The cash budget is used to determine how a firm will raise the cash
18.7 Summary and Conclusions
