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Chapter 29
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Irwin/McGraw Hill
Tracing Changes in Cash and Working Capital
Cash Budgeting
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Net Working Capital - Current assets minus current liabilities. Often called working capital.
Cash Conversion Cycle - Period between firm’s payment for materials and collection on its sales.
Carrying Costs - Costs of maintaining current assets, including opportunity cost of capital.
Shortage Costs - Costs incurred from shortages in current assets.
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Firm’s Cumulative Capital Requirement
Lines A, B, and C show alternative amounts of long-term finance.
Strategy A: A permanent cash surplus
Strategy B: Short-term lender for part of year and borrower for remainder
Strategy C: A permanent short-term borrower
A
B
C
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Irwin/McGraw Hill
Irwin/McGraw Hill
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Irwin/McGraw Hill
Paid $1 mil dividend.
Invested $14 mil.
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Step 1 - Forecast the sources of cash.
Step 2 - Forecast uses of cash.
Step 3 - Calculate whether the firm is facing a cash shortage or surplus.
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AR ending balance = AR beginning balance + sales - collections
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Irwin/McGraw Hill
Payment of accounts payable
Capital expenditures
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Example - Dynamic Mattress Company
Dynamic forecasted deferrable expenses
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Example -
Dynamic
Mattress
Company-
-0.1
0.0
0.0
0.0
3.2
0.0
-1.0
-2.2
46.5
15.0
0.3
-35.0
14. Net interest paid-0.11.42.21.0
17. Total cash required49.616.4-24.8-36.2