Chapter 16
Short-Term Financing
Order Order
Placed Received
Sale Payment Sent Cash
Received
Accounts Collection
< Inventory > < Receivable > < Float >
Time ==>
Accounts Disbursement
< Payable > < Float >
Cash
Invoice Received Payment Sent Disbursed
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2005 by Thomson Learning, Inc.

Learning Objectives
 Formulate a short-term financing strategy.
 Choose the appropriate financing instrument.
 Compute the effective cost of financing.
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2005 by Thomson Learning, Inc.

Financing and the Cash Flow
Timeline
 A deficit cash position may result from the interaction of inefficient or inappropriate working capital policies
 Management should first evaluate its working capital policies to ensure the most efficient stream of cash flow from operations
 Once this is done, then a short-term financing strategy should be developed
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2005 by Thomson Learning, Inc.

Financing Strategies
 Aggressive strategy
 Conservative strategy
 Moderate strategy
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2005 by Thomson Learning, Inc.

$
Financing Strategies: Aggressive
Short-Term Financing
Temporary Current Assets
Permanent Current Assets
Long-Term
Financing
Fixed Assets
Time
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2005 by Thomson Learning, Inc.

$
Financing Strategies:Conservative
Excess Liquidity
Temporary Current Assets
Long-Term
Financing
Permanent Current Assets
Fixed Assets
Time
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2005 by Thomson Learning, Inc.

$
Financing Strategies: Moderate
Excess
Liquidity
Short-Term
Financing
Temporary Current Assets
Permanent Current Assets
Long-Term
Financing
Fixed Assets
Time
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2005 by Thomson Learning, Inc.

Financing Alternatives
 Role of the Internet
 Credit lines
 Letter of credit

Banker’s acceptance
 Reverse repurchase agreement
 Commercial paper
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Asset Based Loans
 Receivable financing
–
Pledging
–
Factoring
 Inventory financing
–
Floating lien
–
Trust receipts
–
Warehouse receipts
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2005 by Thomson Learning, Inc.

Effective Cost
 Equation 16.1
 Commercial paper
 Credit Line
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2005 by Thomson Learning, Inc.

Exhibit 16-4 Average Weekly Short-
Term Financing Yields for 1999-
2003
Exhibit 16-4
Comparison of Average Weekly Short-Term
Financing Yields for 1999-2003
6
5
4
10
9
8
7
3
2
1
0
Ja n-
99
M ay
-9
9
S ep
-9
9
Ja n-
00
M ay
-0
0
S ep
-0
0
Ja n-
01
M ay
-0
1
S ep
-0
1
Ja n-
02
M ay
-0
2
S ep
-0
2
Ja n-
03
M ay
-0
3
S ep
-0
3
Time Prime rate
90-day Commercial paper
90-day Treasury bills
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2005 by Thomson Learning, Inc.

Equation 16.1
Out of pocket
Expenses 365
Effective rate = -------------------- x ------(16.1)
Usable funds M
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2005 by Thomson Learning, Inc.

Commercial Paper
 Out of pocket costs
–
Interest expense
–
Commitment fee
–
Dealer fee
 Usable funds
– Discounted price (Face value less interest)
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2005 by Thomson Learning, Inc.

Credit Line
 Out of pocket costs
–
Interest expense
–
Commitment fee
 Usable funds
–
Compensating balance
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2005 by Thomson Learning, Inc.

Summary
 Short-term financing alternatives in this chapter differ from spontaneous financing sources such as payables and accruals.
 The chapter began with a discussion of financing three financing strategies.
 Then discussion focused on the major forms of short-term financing available.
 The chapter concluded with a discussion of calculating the effective cost of financing with commercial paper and credit lines.
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2005 by Thomson Learning, Inc.