Working Capital Management

CHAPTER 4 Cash—Credit and Short-Term Financial Instruments

This chapter covers these topics:

• Matching of cash collections and disbursements in an integrated process.
• Understanding how to construct cash forecasts and cash budgets.
• Learning about lines of credit and asset-based financing.
• Evaluation of alternatives in the investment of excess short-term funds.
• Importance of policies on the short-term investment of excess funds.

THE PREVIOUS CHAPTER DISCUSSED PROCEDURES to manage cash as it is received and disbursed. In this chapter we analyze the choices financial managers have when short-term liquidity requirements do not match cash from operations and bank accounts. The process involves three steps, which we will review in this chapter.

1. Developing a short-term forecast
2. Preparing a cash budget

• 3A. Arranging for a line of credit or other financing for temporary cash deficiencies or
• 3B. Investing any excess cash in securities with short-term maturities

DEVELOPING A SHORT-TERM FORECAST

Statistics can be applied to business forecasting through various processes. One technique is regression analysis, which measures how much of a factor (the dependent variable) is caused by other factors (the independent variables). An example is estimating sales based on experience with such causal factors as advertising, sales calls, and recent sales experience. Another useful technique is time series analysis using the moving-average method, which forecasts future events (like sales for the ...