Short-Term Finance and Planning
Short-Term Finance and Planning
Short-Term Finance and Planning
26-3
Current
Liabilities
Current
Net
Assets Working Long-Term
Capital Debt
Other
Net Working Current
= Cash + Current –
Capital Liabilities
Assets
Time
Accounts payable period
Operating cycle
26-12
There are two elements of the policy that a firm
adopts for short-term finance.
◦ The size of the firm’s investment in current assets, usually
measured relative to the firm’s level of total operating
revenues.
Flexible
Restrictive
◦ Alternative financing policies for current assets, usually
measured as the proportion of short-term debt to long-term
debt.
Flexible
Restrictive
Shortage costs
CA* Investment in
Current Assets ($)
Shortage costs
CA* Investment in
Current Assets ($)
Carrying costs
Shortage
costs
CA* Investment in
Current Assets ($)
ACP = 30 days, this implies that 2/3 of sales are collected in the
quarter made, and the remaining 1/3 are collected the following
quarter.
Beginning receivables of $250 will be collected in the first quarter.
Q1 Q2 Q3 Q4
Beginning payables 125 150
313=15
Payment of accounts 275=
0+1/2*6 362 338
125+1/2*300
50