Untitled-29

(^254) Financial Management
Integrated Working Capital Planning
Short-term financial planning is concerned with the management of the company's
short-term, or current assets and liabilities. The most important current assets are cash,
marketable securities, inventories and accounts receivable. The most important current
liabilities are bank loans and accounts payable.
Current assets and liabilities are turned over much more rapidly than the other items on
the balance sheet. Short-term financing and investment decisions are more quickly and
easily reversed than long term decisions. Consequently, the financial manager does not
need to look too far into the future when making them.
The nature of company's short term financial planning problem is determined by the
amount of long term capital it raises. A company that issues large amounts of long term
debt or equity, or which retains a large part of its earnings, may find that it has permanent
excess cash. In such cases there is never any problem paying bills, and short term
financial planning consists of managing the company's portfolio of marketable securities.
Companies with permanent excess cash should look at the cost of funds and pay them
out to the shareholders if they are earning less than the cost of funds.
Other companies raise relatively little long term capital and end up as permanent short
term debtors. Most companies attempt to find a golden mean by financing all fixed
assets and part of current assets with equity and long term debt. This may even be
required by the bank to be so. Such companies may invest cash surpluses during part of
the year and borrow during the rest of the year.
The starting point for short term financial planning is an understanding of sources and
uses of cash. Companies forecast their net cash requirements by forecasting collections
on accounts receivable, adding other cash inflows, and subtracting all forecasted cash
outlays.
If the forecasted cash balance is insufficient to cover day-to-day operations and to
provide a buffer against contingencies, you will need to find additional finance. It may
make sense to raise long term finance if the deficiency is permanent and large. Otherwise
you may choose from a variety of sources of short term finance.
In addition to the explicit costs of short term financing, there are often implicit costs.
The financial manager must choose the financing package that has lowest total cost
(explicit and implicit costs combined) and yet leaves the company with sufficient flexibility
to cover contingencies.
Short Term Financial Planning Model
Working out a consistent short term plan requires burdensome calculations. Fortunately
much of the arithmetic can be delegated to a computer. Many large companies have