Projecting Cash Flows and ST and LT strategies

Permanent current assets

Assets that are permenant in nature in that they are carried even at the low points of the business cycle.

Temporary current assets

Assets that flucuate with the busines cycle as sales vary.

Advantages of ST debt

Can be obtained quickly, cost of obtaining is low, no prepayment penalties, fewer restrictions, interest rates are lower, interest expense is deductible.

Four sections of cash budget

Cash receipts, cash disbusrements, cash surplus or deficit, and cash financing

Lt debt

Debt that has a maturity of more than one year

St debt

Debt that has a maturity of one year or less. "Unfunded"

Financial structure

Influenced by management's attitude toward risk , industry norms, the anticipated future growth rate, and lender's attitudes toward the industry and the specific firm.

Advantages of LT debt

Interest cost is usually fixed, interest expense is deductible, control of firm is not shared by debt holders (unlike equity)

Disadvantages of ST debt

Interest rates can vary, unexpected need for cash could cause cash flows to be insufficient to meet the ST obligations, debt may not be renewable

Net Operating Working Capital (NOWC)

Operating current assets minus operating current liabilties.

Disadvantages of LT debt

Restrictive convenants, can be locked into high interest rates, interest expenses must be paid, a maturity date when principal needs to be repaid, firms generally must limit the amount of this debt that they carry

When LT debt is used

Sale and profits are estimated to be stable or increasing, anticipated profits are sufficient to make good use of leverage, control is important, the existing capital structure has a low use of debt, or requirements or covenants of debt issues are not arduous.

Cash Flow Cycle

The continuous cycle of issuing stock or borrowing, purchasing assets, producting products, selling the product, and collecting cash payments for possible reinvestment.

Target Cash Balance

The desired cash balance necessary to safely conduct business.

Financial leverage

The extent that fixed-income securities (debt and preferred stock) are used in a firm's capital structure

Agressive approach to ST debt

The financing of part of the permanent current assets with spontaneous credit.

Maturity matching approach to financing

The matching of assets to liability maturities. Also known as self-liquidating approach.

Cash Budget

The projections of sources and uses of funds for a specified period of time.

Conservative approach to ST debt

The use of permanent assets to finance some of the seasonal needs and spontaneous credit (A/P) to finance the remaining seasonal needs.