Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VII. Short−Term Financial

Planning and Management

19. Short−Term Finance
    and Planning

(^666) © The McGraw−Hill
Companies, 2002

CHAPTER

19

Short-Term Finance

and Planning

In August 2001,DaimlerChrysler, maker of Mercedes and Chrysler automobiles,

announced an agreement with Union Pacific Corporation. Under the terms of

the agreement, Union Pacific will manage the delivery of 3 million finished

vehicles per year from assembly plants to dealers throughout North America.

DaimlerChrysler believed the new agreement would reduce its delivery time from

12 days to 9 days over the next year, with a goal of a 6-day transit period within

the following five years. While this may seem to be a relatively minor im-

provement, DaimlerChrysler estimated that it will save $280 million over the next

six years in inventory carrying costs as a result of the agreement. As this chapter

explores, the length of time goods are carried in inventory until they are sold is

an important element of short-term financial management, and companies like

DaimlerChrysler pay close attention to it.

o this point, we have described many of the decisions of long-term finance, such

as those of capital budgeting, dividend policy, and financial structure. In this

chapter, we begin to discuss short-term finance. Short-term finance is primarily

concerned with the analysis of decisions that affect current assets and current

liabilities.

Frequently, the term net working capitalis associated with short-term financial deci-

sion making. As we describe in Chapter 2 and elsewhere, net working capital is the dif-

ference between current assets and current liabilities. Often, short-term financial

management is called working capital management.These terms mean the same thing.

There is no universally accepted definition of short-term finance. The most important

difference between short-term and long-term finance is in the timing of cash flows.

Short-term financial decisions typically involve cash inflows and outflows that occur

within a year or less. For example, short-term financial decisions are involved when a

firm orders raw materials, pays in cash, and anticipates selling finished goods in one

year for cash. In contrast, long-term financial decisions are involved when a firm pur-

chases a special machine that will reduce operating costs over, say, the next five years.

What types of questions fall under the general heading of short-term finance? To

name just a very few:

T

639

Interested in a career in

short-term finance? Visit

the Treasury Management

Association web site

at http://www.

treasurymanagement.

com.