This is Fin 300 class. The book is Ross, S., Ross, S. A., Westerfield, R., & Jordan, B. D. (2013). Essentials of Corporate Finance. McGraw-Hill Education.8th Ed. Must be 100% original work and at least 200 words. Short-Term Financial Planning" Please respond to the following: Analyze the importance of a company creating a plan to meet its short-term financial goals. Prepare a brief outline of key steps that a company could take in order to meet its short-term financial goals. Suggest two (2) options that are available to a firm whose management believes it has too much cash and cash equivalent. Conversely, suggest two (2) options that are available to a firm whose management believes it has too little cash and cash equivalent. Provide a rationale for all of your suggestions.

Financial Management FIN300 Short-Term Financial Planning Objectives Upon completion of this lesson you will be able to: - Discuss operating and cash cycles and why they are important - Differentiate between the types of short-term financial policy - Identify the essentials of short-term financial planning Sources and Uses of Cash Sources of Cash - Obtaining financing Increase in current liabilities Increase in long-term debt Increase in equity - Selling or converting assets Decrease in current assets Decrease in fixed assets Uses of Cash - Paying creditors or stockholders Decrease in current liabilities Decrease in long-term debt Decrease in equity - Buying assets Increase in current assets Increase in fixed assets The Operating Cycle The time it takes to receive inventory, process it, sell it and collect on the receivables generated from sales Operating cycle = inventory period + accounts receivable period - Inventory period = time inventory is in process and finished goods sit on the shelf - Accounts receivable period = time it takes to collect on receivables The Cash Cycle The time between payment for inventory and receipt from the sale of inventory Cash cycle = operating cycle - accounts payable period - Accounts payable period = time between receipt of inventory and payment for it The cash cycle measures how long we need to finance inventory and receivables Calculating The Operating Cycle Inventory turnover - Cost of good sold/Average inventory 3.65 times Inventory period - 365 days/3.65 = 100 days Receivables turnover - Credit sales/Average accounts receivable 8.11 times Receivables (collection) period - 365 days/8.11 = 45 days Operating cycle = inventory period + receivables period - 100 + 45 = 145 days Calculating The Cash Cycle Payables turnover - Cost of goods sold/Average payables 12.17 Payables period - 365 days/12.17 = 30 days Cash cycle = operating cycle - payables period - 145 - 30 = 115 days Short-Term Financial Policy Flexible (Conservative) Policy - Large amounts of cash and marketable securities - Large amounts of inventory - Liberal credit policies (large accounts receivable) - Relatively low levels of short-term liabilities High liquidity - High net working capital Restrictive (Aggressive) Policy - Low cash and marketable security balances - Low inventory levels - Little or no credit sales (low accounts receivable) - Relatively high levels of short-term liabilities Low liquidity - Low net working capital Choosing the Best Policy Best policy will be a combination of flexible and restrictive policies Compromise policy - borrow short-term to meet peak needs, maintain a cash reserve for unexpected situations Cash Budget Important tool in short-term financial planning - Identify short-term needs and potential opportunities - Identify when short-term financing may be required How it works - Identify sales and other cash collections - Identify various cash outflows - Subtract outflows from inflows and determine investing and financing needs Example: Cash Budget Information Expected Sales by quarter (in millions) - - - - Q1: $56 Q2: $66 Q3: $66 Q4: $90 Beginning Accounts Receivable = $30 million Average collection period = 30 days Purchases from suppliers = 50% of next quarter's estimated sales Accounts payable period = 45 days Wages, taxes and other expenses = 25% of sales Interest and dividends = $5 million per quarter Major expansion planned for Quarter 2 costing $35 million Beginning cash balance = $5 million with minimum cash balance of $2 million Example: Cash Budget Collections ($ millions) Q1 Q2 Q3 Q4 Beginning Receivables 30 23 33 33 Sales 56 66 66 90 Cash Collections = Beg. Receivables + 1/2(Sales) 58 56 66 78 Ending Receivables = 1/2(Sales) 23 33 33 45 Example: Cash Budget Disbursements ($ millions) Q1 Q2 Q3 28.00 33.00 33.00 Q4 45.00 Wages, taxes, other expenses = 25% of sales 14.00 16.50 16.50 22.50 Capital Expenditures 35.00 Payment of A/P = 50% of sales Long-term financing (interest and dividends) Total Disbursements 5.00 5.00 5.00 5.00 47.00 89.50 54.50 72.50 Example: Cash Flow and Cash Balance ($ millions) Q1 Q2 Q3 Q4 Total Cash Collections 58.00 56.00 66.00 82.00 Total Cash Disbursements 47.00 89.50 54.50 72.50 Net Cash Flow 11.00 (33.50) 11.50 9.5 5.00 16.00 (17.50) (8.00) Net Cash Inflow 11.00 (33.50) 11.50 9.50 Ending Cash Balance 16.00 (17.50) (6.00) 1.50 Minimum Cash Balance -2.00 -2.00 -2.00 -2.00 Cumulative surplus (deficit) 14.00 (19.50) (8.00) (0.50) Beginning Cash Balance Short-Term Borrowing Unsecured loans - Line of credit - prearranged agreement with a bank that allows the firm to borrow up to a certain amount on a shortterm basis, usually paid down to zero once a year Committed - formal legal arrangement that may require a commitment fee and generally has a floating interest rate Non-committed - informal agreement with a bank that is similar to credit card debt for individuals - Notes payable 90 to 360 days, fixed interest rate - Commercial paper May be bought and sold Secured loans - Loan secured by receivables or inventory Check Your Understanding Summary Operating and cash cycles Types of short-term financial policy Essentials of short-term financial planning Financial Management FIN300 Working Capital Management Objectives Upon completion of this lesson you will be able to: - Explain how firms manage their cash and identify some of the collection, concentration, and disbursement techniques used - Analyze how firms manage their receivables and the basic components of a firm's credit policies - Differentiate between the types of inventory and inventory management systems used by firms and explain what determines the optimal inventory level Reasons for Holding Cash Keynesian motives for holding cash - Speculative motive - hold cash to take advantage of unexpected opportunities - Precautionary motive - hold cash in case of unexpected difficulties - Transaction motive - hold cash to pay the day-to-day bills Understanding Float Float - difference between cash balance recorded in the cash account and the cash balance recorded at the bank Disbursement float - Generated when a firm writes checks - Available balance at bank - book balance > 0 Collection float - Checks received increase book balance before the bank credits the account - Available balance at bank - book balance