Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionVII. Short−Term Financial
Planning and Management- Short−Term Finance
and Planning
(^682) © The McGraw−Hill
Companies, 2002
aircraft and missile producers are less efficient? Probably not; instead, it is likely that
the relatively high inventory levels consist largely of aircraft under construction. Be-
cause these are expensive products that take a long time to manufacture, inventories are
naturally higher.
THE CASH BUDGET
The cash budgetis a primary tool in short-run financial planning. It allows the financial
manager to identify short-term financial needs and opportunities. An important function
of the cash budget is to help the manager explore the need for short-term borrowing. The
idea of the cash budget is simple: it records estimates of cash receipts (cash in) and dis-
bursements (cash out). The result is an estimate of the cash surplus or deficit.
Sales and Cash Collections
We start with an example involving the Fun Toys Corporation. We will prepare a quar-
terly cash budget. We could just as well use a monthly, weekly, or even daily basis. We
CONCEPT QUESTIONS
19.3a What keeps the real world from being an ideal one in which net working capi-
tal could always be zero?
19.3bWhat considerations determine the optimal size of the firm’s investment in cur-
rent assets?
19.3c What considerations determine the optimal compromise between flexible and
restrictive net working capital policies?
CHAPTER 19 Short-Term Finance and Planning 655
TABLE 19.2
Printing and Industrial Iron and Aircraft
Publishing Chemicals Steel and Missiles
Current assets
Cash 3.2% 1.2% 3.7% 1.2%
Marketable securities 2.2 0.8 5.6 2.7
Accounts receivable 13.8 14.4 15.8 15.4
Inventory 7.1 11.2 18.9 40.2
Other current assets 4.5 3.5 1.6 1.5
Total current assets 30.8% 31.1% 45.6% 61.0%
Current liabilities
Notes payable 3.7% 6.9% 3.7% 3.9%
Accounts payable 5.7 6.6 10.2 8.8
Accruals and other current liabilities 8.7 9.7 12.2 38.3
Total current liabilities 18.1% 23.2% 26.1% 51.0%Source: N. C. Hill and W. L. Sartoris, Short-Term Financial Management, 2d ed. (New York: Macmillan, 1992), p.12.Current Assets and Current Liabilities as a Percentage of Total Assets for Selected
Industries: 199019.4
cash budget
A forecast of cash
receipts and
disbursements for the
next planning period.