Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionVII. Short−Term Financial
Planning and Management- Short−Term Finance
and Planning
(^684) © The McGraw−Hill
Companies, 2002
Cash Outflows
Next, we consider the cash disbursements, or payments. These come in four basic
categories:
1.Payments of accounts payable.These are payments for goods or services rendered
by suppliers, such as raw materials. Generally, these payments will be made
sometime after purchases.
2.Wages, taxes, and other expenses.This category includes all other regular costs of
doing business that require actual expenditures. Depreciation, for example, is often
thought of as a regular cost of business, but it requires no cash outflow and is not
included.
3.Capital expenditures.These are payments of cash for long-lived assets.
4.Long-term financing expenses.This category includes, for example, interest
payments on long-term debt outstanding and dividend payments to shareholders.
Fun Toys’s purchases from suppliers (in dollars) in a quarter are equal to 60 percent
of the next quarter’s predicted sales. Fun Toys’s payments to suppliers are equal to the
previous quarter’s purchases, so the accounts payable period is 90 days. For example, in
the quarter just ended, Fun Toys ordered .60 $200 $120 in supplies. This will ac-
tually be paid in the first quarter (Q1) of the coming year.
Wages, taxes, and other expenses are routinely 20 percent of sales; interest and divi-
dends are currently $20 per quarter. In addition, Fun Toys plans a major plant expansion
(a capital expenditure) costing $100 in the second quarter. If we put all this information
together, the cash outflows are as shown in Table 19.4.
The Cash Balance
The predicted net cash inflowis the difference between cash collections and cash dis-
bursements. The net cash inflow for Fun Toys is shown in Table 19.5. What we see im-
mediately is that there is a cash surplus in the first and third quarters and a cash deficit
in the second and fourth.
CHAPTER 19 Short-Term Finance and Planning 657
TABLE 19.4
Cash Disbursements
for Fun Toys (in Millions)Q1 Q2 Q3 Q4
Payment of accounts (60% of sales) $120 $180 $150 $240
Wages, taxes, other expenses 40 60 50 80
Capital expenditures 0 100 0 0
Long-term financing expenses
(interest and dividends) 20 20 20 20
Total cash disbursements $180 $360 $220 $340TABLE 19.5
Net Cash Inflow for Fun
Toys (in Millions)Q1 Q2 Q3 Q4
Total cash collections $220 $250 $275 $325
Total cash disbursements 180 360 220 340
Net cash inflow $40 $110 $ 55 $15