Keuangan Perusahaan Lanjutan

Short Term Finance

LO 1 : Tracing Cash and Net Working Capital

Basic balance sheet identity can be written as :

NWC + Fixed Asset = Long term debt + Equity

NWC = (Cash + Other Current Asset) – CL

Cash = Long Term Debt + Equity + CL – Current Asset Other Than Cash – Fixed Asset

Activiites That Increase Cash

1. Increasing Long Term Debt

2. Increasing Equity
3. Increasing Current Liability
4. Decreasing Current Asset Other Than Cash
5. Decreasing Fixed Asset

Activiites That Decrease Cash

1. Decreasing Long Term Debt

2. Decreasing Equity
3. Decreasing Current Liability
4. Increasing Current Asset Other Than Cash
5. Increasing Fixed Asset

Activities that increase cash are called source of cash. Those activities that decrease cash are called uses of cash.

LO 2 : The Operating Cycle and the Cash Cycle

Operating Cycle

Operating Cycle : From the time we aquire some inventory to time we collect the cash

Inventory Period : From the time we aquire some inventory to sell the inventory

Account Receivable Period : From sell inventory to collect on sale

Operating Cycle = Inventory Period + AR Period

Cash Cycle

Cash Cycle : The number of days that pass before we collect the cash from a sale, measured from when we actually pay for
the inventory.

Account Payable Period : Time when we don’t pay for the inventory

Cash Cycle = Operating Cycle – AP Period

The gap between short tems inflows and outflows can be filled either borrowing or by holding a liquidity reserve in the form of
cash or marketable securities. Alternatively, the gap can be shortened by changing the inventory, receivable, and payable
periods.
Managers who deal with short term financial problem

TITLE OF MANAGER DUTIES RELATED SHORT TERM ASSET / LIABILITY INFLUENCED

FINANCIAL MANAGEMENT
CASH MANAGER Collection,concentration,disbursement Cash, Marketable securities, ST Loans
Short term investment, short term
borrowing, banking relation
CREDIT MANAGER Monitoring and control AR AR
MARKETING MANAGER Credit policy decision AR
PURCHASING MANAGER Decision on purchases, suppliers Inventory, AP
PRODUCTION MANAGER Setting of production schedules and Inventory, AP
material requirement
PAYABLES MANAGER Decision on payment policies and on AP
wheter to take discount
CONTROLLER Accounting information cash inflows, AR,AP
reconcillation of AP

Calculating the Operationg and Cash Cycle

Example : Balance sheet information

Item Beginning Ending Average

Inventory 2000 3000 2500
AR 1600 2000 1800
AP 750 1000 875

Net Sales 11500

COGS 8200

Operating Cycle

Cash Cycle

LO 3 : Some Aspect of Short Term Financial Policy

The policy that a firm adopts for short term finance will be composed of at least two element :

a. The size of the firm investment in CA

b. The financing of CA

Flexible short term financial policies

1. Keeping large balances of cash and marketable securities

2. Making large investment in inventory
3. Granting liberal credit terms

Restrictive short term financial policies

1. Keeping low cash balances

2. Making small investment in inventory
3. Allowing no credit sales

Carrying Cost : Cost that rise with the level of investment in CA

Carrying cost generally of two types. First, because rate of return on CA is low compared to that other asset. Second, is the
cost of maintaining the economic value of item

Shortage Cost : Cost that fall with increases in the level of investment in CA

Two kinds of shortage cost. Order cost, cost of placing an order for more cash or more inventory. Cost related to safety
reserves, cost lost of sales, lost customer goodwill, disruption of production schedule.

Alternative Financing Policies

1. An Ideal Model : Short term asset can always be financed with short term debt, long term asset can be financed with
long term debt and or equity, NWC is always zero
2. Different Strategies for Financing CA : Strategy F, always implies a short term cash surplus and a large investment in
cash and marketable securities. Strategy R, uses long term financing for continuing asset requirement only, and short
term borrowing for seasonal variation.

LO 4 : Short Term Financial Plan

Financing Option Include :

1. Unsecured bank borrowing

2. Secured borrowing
3. Other Securities

Unsecured Loan

Firm that use short term bank loans usually ask their bank for either a noncommitted or a committed line of credit.

A noncommitted line of credit = informal arrangement that allows firms to borrow up to a previously specified limit without going
trough the normal paperwork. The interest rate on the line of credit is usually set equal to the bank prime lending +additional
percentage.

Committed line of credit = formal legal arrangements usually involved commitement fee paid by the firm to the bank. For larger
firm Interest rate tide to the LIBOR. For midsized and smaller often required to keep compensating balances in the bank.
Compensating balance = deposit of the firm keeps with the bank in low interest or non interest bearing account.

Secured Loan

Security for short term loans usually consist of AR or Inventories

Other Sources

Commercial paper = consist of short term notes issued by large, highly rated firms. Typically these notes are of short maturity
raging up to 270 days. The rate the firm obtains is often significantly below the prime rate the bank would charge it for direct
loan.

A banker acceptance = agreement by a bank to pay sum of money.

LO 5 : Investing Idle Cash

Temporary Cash Surpluses

a. Seasonal or Cyclical Activities

Some firms have a predictable CF pattern. They have surplus CF during part of the year and deficit CF the
rest of the year. Firm may buy marketable securities when surplus CF occur and sell marketable securities
when deficits occur. Bank loan are another short term financing device.

b. Planned or Possible Expenditure

Firms frequently accumulate temporary investment in marketable securities to provide the cash. Thus, firms
may issue bonds and stocks before the cash is needed

Characteristics of Short Term Securities

Maturity : Firm that invest in long term securities are accept greater risk (Interest Rate Risk). Firms often limit
their investment in marketable securities to those maturing in less than 90 days to avoid the risk of losses in the
value of changing interest rate.

Default Risk : Probability that interest and principal will note be paid

Marketability : How easy it is to convert an asset to cash.

Taxability :Interest earned on money market securities that are not some kind of government obligation is taxable
at local, state, and federal.

LO 6 : Determination of the Target Cash Balance

Cost of Holding Cash

BAT Model
 Trading Cost T/C *F

The Miller – Orr Model

LO 7 : Management of AP and AR

Costs of granting credit

 Chance that customers will not pay (i.e., bad debts)

 Financing receivables

Credit management examines the trade-off between increased sales and the costs of granting credit.
LO 8 : Inventory Management

Inventory Cost

Carrying costs – range from 20 – 40% of inventory

 value per year

 Storage and tracking
 Insurance and taxes
 Losses due to obsolescence, deterioration, or theft
 Opportunity cost of capital

Shortage costs

 Restocking costs
 Lost sales or lost customers