copyright 2002 by south-western, a division of thomson learning tm short-term financial management,...

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Copyright Copyright 2002 by South-Western, a division 2002 by South-Western, a division of Thomson Learning of Thomson Learning TM TM SHORT-TERM FINANCIAL MANAGEMENT, 2e SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow Terry S. Maness and John T. Zietlow ht ht 2002 by South-Western, a division of Thomson Learning. 2002 by South-Western, a division of Thomson Learning. Learning Learning TM TM is a trademark used herein under license. is a trademark used herein under license. hts reserved. No part of this PowerPoint hts reserved. No part of this PowerPoint TM TM presentation may be repr presentation may be repr smitted in any form or by any means, electronic or mechanical, incl smitted in any form or by any means, electronic or mechanical, incl nto or storage in any information system, without permission in wri nto or storage in any information system, without permission in wri e publisher. e publisher. slides may be displayed and may be reproduced in print form for slides may be displayed and may be reproduced in print form for tional purposes only, provided a proper copyright notice appears tional purposes only, provided a proper copyright notice appears slide. slide. mission to use material from this text or product, contact us by mission to use material from this text or product, contact us by 0) 730-2214, FAX (800) 730-2215 or at http://www.thomsonrights.com 0) 730-2214, FAX (800) 730-2215 or at http://www.thomsonrights.com d in the United States of America d in the United States of America 0-030-31517-4 0-030-31517-4

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Page 1: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

SHORT-TERM FINANCIAL MANAGEMENT, 2eSHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow Terry S. Maness and John T. Zietlow

Copyright Copyright 2002 by South-Western, a division of Thomson Learning. 2002 by South-Western, a division of Thomson Learning. Thomson LearningThomson LearningTM TM is a trademark used herein under license.is a trademark used herein under license.

All rights reserved. No part of this PowerPointAll rights reserved. No part of this PowerPointTMTM presentation may be reproduced presentation may be reproduced or transmitted in any form or by any means, electronic or mechanical, including or transmitted in any form or by any means, electronic or mechanical, including input into or storage in any information system, without permission in writing input into or storage in any information system, without permission in writing from the publisher.from the publisher.

Lecture slides may be displayed and may be reproduced in print form for Lecture slides may be displayed and may be reproduced in print form for instructional purposes only, provided a proper copyright notice appears instructional purposes only, provided a proper copyright notice appears on each slide.on each slide.

For permission to use material from this text or product, contact us by For permission to use material from this text or product, contact us by TEL (800) 730-2214, FAX (800) 730-2215 or at http://www.thomsonrights.comTEL (800) 730-2214, FAX (800) 730-2215 or at http://www.thomsonrights.com

Produced in the United States of AmericaProduced in the United States of America

ISBN: 0-030-31517-4ISBN: 0-030-31517-4

Page 2: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

Chapter 1Chapter 1The Role of Working CapitalThe Role of Working Capital

SalesSales

A /RA /R

CashCash

InvInv

Page 3: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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

Discussion of appropriate level of WCDiscussion of appropriate level of WC

Page 4: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

The Cash Flow TimelineThe Cash Flow Timeline

OrderOrder Order Order Sale Sale 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 Invoice Payment Payment CashCash Received Sent Received Sent PaidPaid

OrderOrder Order Order Sale Sale 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 Invoice Payment Payment CashCash Received Sent Received Sent PaidPaid

Page 5: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

...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

Page 6: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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 Stock Common 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 Stock Common Stock 500 500

TotalTotal $1,300$1,300 TotalTotal $1,300$1,300

Page 7: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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

Page 8: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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 Retained Earnings 2525TotalTotal $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 Retained Earnings 2525TotalTotal $1,325$1,325 TotalTotal $1,325$1,325

Page 9: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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 Retained Earnings 2525TotalTotal $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 Retained Earnings 2525TotalTotal $1,025$1,025 TotalTotal $1,025$1,025

Page 10: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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 Retained Earnings 2525TotalTotal $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 Retained Earnings 2525TotalTotal $1,025$1,025 TotalTotal $1,025$1,025

Page 11: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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?

AnswerAnswer: Some expenses are not cash expenses.: 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?

AnswerAnswer : The cash deficit was due to the : The cash deficit was due to the differences between the timing of cash differences between the timing of cash disbursements and cash receipts.disbursements and cash receipts.

Page 12: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

Two Important Points to RememberTwo Important Points to Remember

(1) The firm must manage its cost structure to (1) The firm must manage its cost structure to generate a profitgenerate a profit

(2) Working Capital accounts must be managed so (2) Working Capital accounts must be managed so that liquidity is maintained.that liquidity is maintained.

Example: Dell and its “Golden Triangle”Example: Dell and its “Golden Triangle”

Page 13: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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

Page 14: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

Managing the Cash CycleManaging the Cash Cycle

Managing InventoryManaging Inventory

Managing ReceivablesManaging Receivables

Managing PayablesManaging Payables

Electronic CommerceElectronic Commerce

Page 15: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

Managing InventoryManaging Inventory

Just-In-Time (JIT)Just-In-Time (JIT)

Trade-offs between:Trade-offs between:

– stock out costsstock out costs

– cost of excess inventorycost of excess inventory

– ordering costsordering costs

Page 16: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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

Page 17: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

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

Page 18: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

Electronic CommerceElectronic Commerce

Revolutionizing management of cash cycleRevolutionizing management of cash cycle

Proprietary systemsProprietary systems

Impact of InternetImpact of Internet

Page 19: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

How Much WC is Enough?How 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

Page 20: Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

SummarySummary

Firm must operate at a profitable levelFirm must operate at a profitable level

A profitable firm may still struggle financiallyA 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 failan otherwise profitable firm to fail

A successful firm’s operation is managed from a A successful firm’s operation is managed from a – profit, profit, and and

– cash flow perspectivecash flow perspective