chapter 16 Financial Mngt. Short-Term Financial Planning

cash budget

A forecast of cash receipts and disbursements for the next planning period.

line of credit

A formal committed or informal non-committed prearranged, short-term bank loan.

accounts receivable financing

A secured short-term loan that involves either the assignment or factoring of receivables.

inventory loan

A secured short-term loan to purchase inventory.

inventory turnover formula=

Cost of goods sold / Average inventory

payable turnover formula=

Cost of goods sold / Average payable

shortage costs

Costs that fall with increases in the level of investment in current assets.

carrying costs

Costs that rise with increases in the level of investment in current assets.

receivable turnover formula=

Credit sales / Average accounts receivable

cash flow time line

Graphical representation of the operating cycle and the cash cycle.

Operating cycle formula=

Inventory period -minus- Accounts receivable period.

The basic balance sheet identity can be written as:

Net working capital + Fixed assets= Long-term debt + Equity

Cash cycle formula=

Operating cycle - Accounts payable period

cash cycle

The time between cash disbursement and cash collection.

accounts payable period

The time between receipt of inventory and payment for it.

accounts receivable period

The time between sale of inventory and collection of the receivable. It is also called the days' sales in receivables or the average collection period.

inventory period

The time it takes to acquire and sell inventory.

operating cycle

The time period between the acquisition of inventory and the collection of cash from receivables.

sources and uses of cash

activities that increase cash are called sources of cash. Those activities that decrease cash are called uses of cash. Looking back at our list, we see that sources of cash always involve increasing a liability or equity account or decreasing an asset account.

net working capital

cash plus other current assets, less current liabilities.

Inventory period formula=

365 days / Inventory turnover

accounts payable period formula=

365 days / Payables turnover

Accounts receivables period formula=

365 days / Receivables turnover