Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition(^28) Front Matter Preface © The McGraw−Hill
Companies, 2002
xxviii CONTENTS
PART SEVEN
Short-Term Financial Planning and
Management 637
Chapter 19
Short-Term Finance and Planning 639
19.1 Tracing Cash and Net Working Capital 640
19.2 The Operating Cycle and the Cash Cycle 641
Defining the Operating and Cash Cycles 642
The Operating Cycle 642
The Cash Cycle 643
The Operating Cycle and the Firm’s Organizational
Chart 644
Calculating the Operating and Cash Cycles 644
The Operating Cycle 645
The Cash Cycle 646
Interpreting the Cash Cycle 647
19.3 Some Aspects of Short-Term Financial
Policy 648
The Size of the Firm’s Investment in Current
Assets 648
Alternative Financing Policies for Current Assets 651
An Ideal Case 651
Different Policies for Financing Current Assets 652
Which Financing Policy Is Best? 653
Current Assets and Liabilities in Practice 654
19.4 The Cash Budget 655
Sales and Cash Collections 655
Cash Outflows 657
The Cash Balance 657
19.5 Short-Term Borrowing 658
Unsecured Loans 659
Compensating Balances 659
Cost of a Compensating Balance 659
Letters of Credit 660
Secured Loans 660
Accounts Receivable Financing 660
Inventory Loans 661
Other Sources 661
19.6 A Short-Term Financial Plan 662
19.7 Summary and Conclusions 663
Chapter 20
Cash and Liquidity Management 673
20.1 Reasons for Holding Cash 673
The Speculative and Precautionary Motives 673
The Transaction Motive 674
Compensating Balances 674
Costs of Holding Cash 674
Cash Management versus Liquidity
Management 675
20.2 Understanding Float 675
Disbursement Float 675
Collection Float and Net Float 676
Float Management 677
Measuring Float 677
Some Details 678
Cost of the Float 679
Ethical and Legal Questions 680
Electronic Data Interchange: The End of Float? 681
20.3 Cash Collection and Concentration 682
Components of Collection Time 682
Cash Collection 682
Lockboxes 683
Cash Concentration 684
Accelerating Collections: An Example 684
20.4 Managing Cash Disbursements 687
Increasing Disbursement Float 687
Controlling Disbursements 687
Zero-Balance Accounts 688
Controlled Disbursement Accounts 688
20.5 Investing Idle Cash 688
Temporary Cash Surpluses 689
Seasonal or Cyclical Activities 689
Planned or Possible Expenditures 690
Characteristics of Short-Term Securities 690
Maturity 690
Default Risk 690
Marketability 690
Taxes 690
Some Different Types of Money Market
Securities 690
20.6 Summary and Conclusions 691
Appendix 20A Determining the Target Cash
Balance 696
The Basic Idea 697
The BAT Model 698
The Opportunity Costs 699
The Trading Costs 699
The Total Cost 700
The Solution 700
Conclusion 702
The Miller-Orr Model: A More General
Approach 702
The Basic Idea 702
Using the Model 702
Implications of the BAT and Miller-Orr Models 703
Other Factors Influencing the Target Cash
Balance 704
Chapter 21
Credit and Inventory Management 707
21.1 Credit and Receivables 707
Components of Credit Policy 708
The Cash Flows from Granting Credit 708