chapter 27 Flashcards
cash flow shock
occurs when cash flows are temporarily negative or positive for an unexpected reason. they can be negative or positive and create demand for short-term financing.
matching principle
states that short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds.
permanent working capital
the amount a firm must keep invested in its short-term assets to support its continuing operations. it is required as long as the firm remains in business, and is thus a long-term investment financed with long-term sources of funds.
temporary working capital
a firm’s investment in accounts receivable and inventory which is temporary and results from seasonal fluctuations in the firm’s business or unanticipated shocks. it is the difference between the actual level of investment in short-term assets and the permanent working capital investment. it represents a short-term need and is thus financed with short-term financing.
aggressive financing policy
when a firm finances part of the permanent working capital with short-term debt.
ultra-aggressive policy
when a firm even finances some of its plant, property, and equipment with short-term sources of funds. it may be beneficial if market imperfections, eg. agency costs and asymmetric information are important.
funding risk
the risk of incurring financial distress costs, should the firm not be able to refinance its debt in a timely manner or at a reasonable rate. this can occur when relying on short-term debt.
conservative financing policy
when a firm finances its short-term needs with long-term debt.
commercial paper
a short-term, unsecured debt used by large corporations that is usually a cheaper source of funds than a short-term bank loan. it is referred to as either direct paper or dealer paper. it is rated by credit rating agencies.
direct paper
when the firm sells the commercial paper directly to investors.
dealer paper
when dealers sell the commercial paper to investors in exchange for a spread (or fee) for their services. the spread decreases the proceeds that the issuing firm receives, thereby increasing the effective cost of the paper.
(net) working capital
current assets minus current liabilities.
current assets
typically cash, accounts receivables, and inventories.
current liabilties
accounts payables
working capital management
about looking at the optimal level of (components in) working capital. it can maximise the firm’s value, meaning you have to manage trade credit, inventories, and cash.
receivables management
the credit we grant to clients.
credit standards
determining who qualifies for credit.
credit terms
determining the ‘net’ period and the discount.
collection policy
determining actions if customers pay late.
payables management
about deciding whether firms want to pay their suppliers soon or later. a firm should check the accounts payable days to see if payments are made at an optimal time.
inventory management
determines the optimal level of inventory given the trade-off.
short-term financing needs
important to forecast in order to identify cash flow pattern through the year to identify cash needs or cash surpluses throughout the year.
projected cash flow statement
used to identify seasonalities and negative or positive cash flow shocks. it is needed to forecast short-term financing needs.
short-term financial planning
occurs within one year.
