Lecture2 - working capital management

Nwccacl 9 componentsofworkingcapital current assets

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Unformatted text preview: rt­term Financial Planning • Short­term finance is the analysis of decisions that affect current assets (CA) and current liabilities (CL) • These decisions will frequently have an impact on the firm within a year. • Focus on net working capital (NWC). • NWC = CA – CL 9 Components of Working Capital Current Assets Cash ST loans to affiliates Marketable securities Accounts receivable Inventories Other CA Total 2,659 2,955 6,118 36,464 35,793 2,929 86,918 Current Liabilities ST loans Accounts payable Taxes payable LT loan payments < 1 yr 22,373 32,275 1,422 1,841 Other CL Total 2,408 60,319 10 Issues in Short­term Financial Planning • ST financial policy issues implicit in a table such as this: – How much should I invest in current assets? Which ones? – What is a reasonable level of cash to keep? – How much inventory should the firm carry? – How much credit should be extended to customers? – How do I finance the current assets? • ST vs. LT liabilities • Loans vs. deferring payments – How much should the firm borrow short term? 11 Tracing Cash Balance Sheet in year t Current Assets (CA) Current Liabilities (CL) Cash Marketable Securities Accounts Receivable Inventories Net PPE (NPPE) Accounts Payable Notes Payable Accrued Expenses Long­Term Debt (LTD) Common Stock (S) Retained Earnings (RE) Cash = LTD + S + RE + CL – CA (excl. cash) – NPPE ∆Cash = ∆LTD + ∆S + ∆RE + ∆CL – ∆CA (excl.cash) – ∆NPPE 12 Deriving ∆Cash ∆Cash = ∆LTD + ∆S + ∆RE + ∆CL – ∆CA (excl. cash) – ∆NPPE ∆RE = NI – Dividends ∆RE = NI – Dividends + Depreciation – Depreciation = OCF – Dividends – Depreciation (OCF = NI + Dep.) ∆Cash = ∆LTD + ∆S + ∆CL – ∆CA (excl. cash) – ∆NPPE – Depreciation + OCF – Dividends (Recall ∆GPPE = ∆NPPE + Depreciation) ∆Cash = ∆LTD + ∆S + ∆CL – ∆CA (excl. cash) – ∆GPPE + OCF – Dividends 13 Deriving ∆Cash ∆Cash = ∆LTD + ∆S + ∆CL – ∆CA (excl. cash) – ∆GPPE + OCF – Dividends CF from operating activities = OCF + [∆CL – ∆CA (excl. cash)] CF from investing = – ∆GPPE CF from financing = ∆LTD + ∆S – Dividends ∆Cash = CF from operating activities + CF from investing + CF from financing 14 Sources and Uses of Cash ∆Cash = ∆LTD + ∆S + ∆CL – ∆CA (excl. cash) – ∆GPPE +OCF – Dividends , where OCF = NI + Dep. Sources of cash: Uses of cash: Long-term debt issued Long-term debt reduce...
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