Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 CHAPTER THIRTY 850 SHORT-TERM F I N A N C I A L P L A N N I N G Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 MOST OF THIS book is devoted to long-term financial decisions such as capital budgeting and the choice of capital structure. Such decisions are called long-term for two reasons. First, they usually in- volve long-lived assets or liabilities. Second, they are not easily reversed and therefore may commit the firm to a particular course of action for several years. Short-term financial decisions generally involve short-lived assets and liabilities, and usually they are easily reversed. Compare, for example, a 60-day bank loan for $50 million with a $50 million is- sue of 20-year bonds. The bank loan is clearly a short-term decision. The firm can repay it two months later and be right back where it started. A firm might conceivably issue a 20-year bond in January and retire it in March, but it would be extremely inconvenient and expensive to do so. In practice, such a bond issue is a long-term decision, not only because of the bond’s 20-year maturity but also because the decision to issue it cannot be reversed on short notice. A financial manager responsible for short-term financial decisions does not have to look far into the future. The decision to take the 60-day bank loan could properly be based on cash-flow forecasts for the next few months only. The bond issue decision will normally reflect forecasted cash require- ments 5, 10, or more years into the future. Managers concerned with short-term financial decisions can avoid many of the difficult conceptual issues encountered elsewhere in this book. In a sense, short-term decisions are easier than long-term decisions, but they are not less important. A firm can identify extremely valuable capital investment op- portunities, find the precise optimal debt ratio, follow the perfect dividend policy, and yet founder be- cause no one bothers to raise the cash to pay this year’s bills. Hence the need for short-term planning. We start the chapter with an overview of the major classes of short-term assets and liabilities. We show how long-term financing decisions affect the firm’s short-term financial planning problem. We describe how financial managers trace changes in cash and working capital, and we look at how they forecast month-by-month cash requirements or surpluses and develop short-term financing strate- gies. We conclude by examining more closely the principal sources of short-term finance. 851 30.1 THE COMPONENTS OF WORKING CAPITAL Short-term, or current, assets and liabilities are collectively known as working cap- ital. Table 30.1 gives a breakdown of current assets and liabilities for all manufac- turing corporations in the United States in 2000. Note that current assets are larger than current liabilities. Net working capital (current assets less current liabilities) was positive. Current Assets One important current asset is accounts receivable. When one company sells goods to another company or a government agency, it does not usually expect to be paid immediately. These unpaid bills, or trade credit, make up the bulk of accounts re- ceivable. Companies also sell goods on credit to the final consumer. This consumer credit makes up the remainder of accounts receivable. We will discuss the manage- ment of receivables in Chapter 32. You will learn how companies decide which cus- tomers are good or bad credit risks and when it makes sense to offer credit. Another important current asset is inventory. Inventories may consist of raw materials, work in process, or finished goods awaiting sale and shipment. Firms Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 invest in inventory. The cost of holding inventory includes not only storage cost and the risk of spoilage or obsolescence but also the opportunity cost of capital, that is, the rate of return offered by other, equivalent-risk investment opportu- nities. 1 The benefits of holding inventory are often indirect. For example, a large inventory of finished goods (large relative to expected sales) reduces the chance of a “stockout” if demand is unexpectedly high. A producer holding a small finished-goods inventory is more likely to be caught short, unable to fill orders promptly. Similarly, large inventories of raw materials reduce the chance that an unexpected shortage would force the firm to shut down production or use a more costly substitute material. Bulk orders for raw materials lead to large average inventories but may be worthwhile if the firm can obtain lower prices from suppliers. (That is, bulk orders may yield quantity discounts.) Firms are often willing to hold large inventories of finished goods for similar reasons. A large inventory of finished goods allows longer, more economical production runs. In effect, the production manager gives the firm a quantity discount. The task of inventory management is to assess these benefits and costs and to strike a sensible balance. In manufacturing companies the production manager is best placed to make this judgment. Since the financial manager is not usually di- rectly involved in inventory management, we will not discuss the inventory prob- lem in detail. The remaining current assets are cash and marketable securities. The cash con- sists of currency, demand deposits (funds in checking accounts), and time deposits (funds in savings accounts). The principal marketable security is commercial pa- per (short-term, unsecured notes sold by other firms). Other securities include U.S. Treasury bills and state and local government securities. In choosing between cash and marketable securities, the financial manager faces a task like that of the production manager. There are always advantages to holding large “inventories” of cash—they reduce the risk of running out of cash and hav- ing to raise more on short notice. On the other hand, there is a cost to holding idle 852 PART IX Financial Planning and Short-Term Management Current Assets Current Liabilities Cash 156.3 Short-term loans 228.4 Marketable securities 104.4 Accounts payable 357.3 Accounts receivable 527.2 Accrued income taxes 55.5 Inventories 510.7 Current payments due 85.3 on long-term debt Other current assets 248.9 Other current liabilities 507.4 Total 1547.5 Total 1233.9 Net working capital (current assets Ϫ current liabilities) ϭ $1,547.5 Ϫ 1,233.9 ϭ $313.6 billion TABLE 30.1 Current assets and liabilities for U.S. manufacturing corporations, first quarter, 2001 (figures in $ billions). Source: U.S. Census Bureau, Quarterly Financial Report for Manufacturing, Mining and Trade Corporations, First Quarter, 2001 (www.census. gov/prod/www/abs/qfr-mm). 1 How risky are inventories? It is hard to generalize. Many firms just assume inventories have the same risk as typical capital investments and therefore calculate the cost of holding inventories using the firm’s average opportunity cost of capital. You can think of many exceptions to this rule of thumb how- ever. For example, some electronics components are made with gold connections. Should an electron- ics firm apply its average cost of capital to its inventory of gold? (See Section 11.1.) Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 cash balances rather than putting the money to work in marketable securities. In Chapter 31 we will tell you how the financial manager collects and pays out cash and decides on an optimal cash balance. Current Liabilities We have seen that a company’s principal current asset consists of unpaid bills from other companies. One firm’s credit must be another’s debit. Therefore, it is not sur- prising that a company’s principal current liability often consists of accounts payable, that is, outstanding payments to other companies. A firm that delays pay- ing its bills is in effect borrowing money from its suppliers. So companies that are strapped for cash sometimes solve the problem by stretching payables. To finance its investment in current assets, a company may rely on a variety of short-term loans. Banks and finance companies are the largest source of such loans, but companies may also issue short-term debt, called commercial paper. We will de- scribe the different kinds of short-term debt toward the end of the chapter. CHAPTER 30 Short-Term Financial Planning 853 30.2 LINKS BETWEEN LONG-TERM AND SHORT-TERM FINANCING DECISIONS All businesses require capital, that is, money invested in plant, machinery, invento- ries, accounts receivable, and all the other assets it takes to run a business efficiently. Typically, these assets are not purchased all at once but obtained gradually over time. Let us call the total cost of these assets the firm’s cumulative capital requirement. Most firms’ cumulative capital requirement grows irregularly, like the wavy line in Figure 30.1. This line shows a clear upward trend as the firm’s business grows. But there is also seasonal variation around the trend: In the figure the capital re- quirements peak late in each year. Finally, there would be unpredictable week-to- week and month-to-month fluctuations, but we have not attempted to show these in Figure 30.1. The cumulative capital requirement can be met from either long-term or short- term financing. When long-term financing does not cover the cumulative capital requirement, the firm must raise short-term capital to make up the difference. When long-term financing more than covers the cumulative capital requirement, the firm has surplus cash available for short-term investment. Thus the amount of long-term financing raised, given the cumulative capital requirement, determines whether the firm is a short-term borrower or lender. Lines A, B, and C in Figure 30.1 illustrate this. Each depicts a different long-term financing strategy. Strategy A always implies a short-term cash surplus. Strategy C implies a permanent need for short-term borrowing. Under B, which is probably the most common strategy, the firm is a short-term lender during part of the year and a borrower during the rest. What is the best level of long-term financing relative to the cumulative capital requirement? It is hard to say. There is no convincing theoretical analysis of this question. We can make practical observations, however. First, most financial man- agers attempt to “match maturities” of assets and liabilities. That is, they finance long-lived assets like plant and machinery with long-term borrowing and equity. Second, most firms make a permanent investment in net working capital (current assets less current liabilities). This investment is financed from long-term sources. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 The Comforts of Surplus Cash Many financial managers would feel more comfortable under strategy A than strat- egy C. Strategy A ϩ (the highest line) would be still more relaxing. A firm with a sur- plus of long-term financing never has to worry about borrowing to pay next month’s bills. But is the financial manager paid to be comfortable? Firms usually put surplus cash to work in Treasury bills or other marketable securities. This is at best a zero- NPV investment for a taxpaying firm. 2 Thus we think that firms with a permanent cash surplus ought to go on a diet, retiring long-term securities to reduce long-term financing to a level at or below the firm’s cumulative capital requirement. That is, if the firm is on line A ϩ , it ought to move down to line A, or perhaps even lower. 854 PART IX Financial Planning and Short-Term Management Dollars Cumulative capital requirement Year 1 Year 2 Year 3 Time A + B C A FIGURE 30.1 The firm’s cumulative capital require- ment (colored line) is the cumulative investment in all the assets needed for the business. In this case the requirement grows year by year, but there is seasonal fluctuation within each year. The requirement for short-term financing is the differ- ence between long-term financing (lines A ϩ , A, B, and C) and the cumu- lative capital requirement. If long- term financing follows line C, the firm always needs short-term financing. At line B, the need is seasonal. At lines A and A ϩ , the firm never needs short-term financing. There is always extra cash to invest. 2 If there is a tax advantage to borrowing, as most people believe, there must be a corresponding tax dis- advantage to lending, and investment in Treasury bills has a negative NPV. See Section 18.1. 30.3 TRACING CHANGES IN CASH AND WORKING CAPITAL Table 30.2 compares 2000 and 2001 year-end balance sheets for Dynamic Mattress Company. Table 30.3 shows the firm’s income statement for 2001. Note that Dynamic’s cash balance increased by $1 million during 2001. What caused this increase? Did the extra cash come from Dynamic Mattress Company’s additional long-term borrowing, from reinvested earnings, from cash released by reducing inventory, or from extra credit extended by Dynamic’s suppliers? (Note the increase in accounts payable.) The correct answer is “all the above.” Financial analysts often summarize sources and uses of cash in a statement like the one shown in Table 30.4. The state- ment shows that Dynamic generated cash from the following sources: 1. It issued $7 million of long-term debt. 2. It reduced inventory, releasing $1 million. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 3. It increased its accounts payable, in effect borrowing an additional $7 million from its suppliers. 4. By far the largest source of cash was Dynamic’s operations, which generated $16 million. See Table 30.3, and note: Income ($12 million) understates cash flow because depreciation is deducted in calculating income. Depreciation is not a cash outlay. Thus, it must be added back in order to obtain operating cash flow. Dynamic used cash for the following purposes: 1. It paid a $1 million dividend. (Note: The $11 million increase in Dynamic’s equity is due to retained earnings: $12 million of equity income, less the $1 million dividend.) CHAPTER 30 Short-Term Financial Planning 855 2000 2001 Current assets: Cash 4 5 Marketable securities 0 5 Inventory 26 25 Accounts receivable 25 30 Total current assets 55 65 Fixed assets: Gross investment 56 70 Less depreciation Ϫ16 Ϫ20 Net fixed assets 40 50 Total assets 95 115 Current liabilities: Bank loans 5 0 Accounts payable 20 27 Total current liabilities 25 27 Long-term debt 5 12 Net worth (equity and retained earnings) 65 76 Total liabilities and net worth 95 115 TABLE 30.2 Year-end balance sheets for 2000 and 2001 for Dynamic Mattress Company (figures in $ millions). Sales 350 Operating costs Ϫ321 29 Depreciation Ϫ4 25 Interest Ϫ1 Pretax income 24 Tax at 50% Ϫ12 Net income 12 TABLE 30.3 Income statement for Dynamic Mattress Company, 2001 (figures in $ millions). Note: Dividend ϭ $1 million; retained earnings ϭ $11 million. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 2. It repaid a $5 million short-term bank loan. 3 3. It invested $14 million. This shows up as the increase in gross fixed assets in Table 30.2. 4. It purchased $5 million of marketable securities. 5. It allowed accounts receivable to expand by $5 million. In effect, it lent this additional amount to its customers. Tracing Changes in Net Working Capital Financial analysts often find it useful to collapse all current assets and liabilities into a single figure for net working capital. Dynamic’s net-working-capital bal- ances were (in millions): 856 PART IX Financial Planning and Short-Term Management Sources: Issued long-term debt 7 Reduced inventories 1 Increased accounts payable 7 Cash from operations: Net income 12 Depreciation 4 Total sources 31 Uses: Repaid short-term bank loan 5 Invested in fixed assets 14 Purchased marketable securities 5 Increased accounts receivable 5 Dividend 1 Total uses 30 Increase in cash balance 1 TABLE 30.4 Sources and uses of cash for Dynamic Mattress Company, 2001 (figures in $ millions). 3 This is principal repayment, not interest. Sometimes interest payments are explicitly recognized as a use of funds. If so, operating cash flow would be defined before interest, that is, as net income plus in- terest plus depreciation. 4 We drew up a sources and uses of funds statement for Executive Paper in Section 29.1. Current Current Net Working Assets Less Liabilities Equals Capital Year-end 2000 $55 Ϫ $25 ϭ $30 Year-end 2001 $65 Ϫ $27 ϭ $38 Table 30.5 gives balance sheets which report only net working capital, not indi- vidual current asset or liability items. “Sources and uses” statements can likewise be simplified by defining sources as activities which contribute to net working capital and uses as activities which use up working capital. In this context working capital is usually referred to as funds, and a sources and uses of funds statement is presented. 4 Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 In 2000, Dynamic contributed to net working capital by 1. Issuing $7 million of long-term debt. 2. Generating $16 million from operations. It used up net working capital by 1. Investing $14 million. 2. Paying a $1 million dividend. The year’s changes in net working capital are thus summarized by Dynamic Mat- tress Company’s sources and uses of funds statement, given in Table 30.6. Profits and Cash Flow Now look back to Table 30.4, which shows sources and uses of cash. We want to reg- ister two warnings about the entry called cash from operations. It may not actually represent real dollars—dollars you can buy beer with. First, depreciation may not be the only noncash expense deducted in calculat- ing income. For example, most firms use different accounting procedures in their tax books than in their reports to shareholders. The point of special tax accounts is to minimize current taxable income. The effect is that the shareholder books CHAPTER 30 Short-Term Financial Planning 857 2000 2001 Net working capital 30 38 Fixed assets: Gross investment 56 70 Less depreciation Ϫ16 Ϫ20 Net fixed assets 40 50 Total net assets 70 88 Long-term debt 5 12 Net worth (equity and retained earnings) 65 76 Long-term liabilities and net worth* 70 88 TABLE 30.5 Condensed year-end balance sheets for 2000 and 2001 for Dynamic Mattress Company (figures in $ millions). *When only net working capital appears on a firm’s balance sheet, this figure (the sum of long-term liabilities and net worth) is often referred to as total capitalization. Sources: Issued long-term debt 7 Cash from operations: Net income 12 Depreciation 4 23 Uses: Invested in fixed assets 14 Dividend 1 15 Increase in net working capital 8 TABLE 30.6 Sources and uses of funds (net working capital) for Dynamic Mattress Company, 2001 (figures in $ millions). Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 overstate the firm’s current cash tax liability, 5 and after-tax cash flow from oper- ations is therefore understated. Second, income statements record sales when made, not when the customer’s payment is received. Think of what happens when Dynamic sells goods on credit. The company records a profit at the time of sale, but there is no cash inflow until the bills are paid. Since there is no cash inflow, there is no change in the company’s cash balance, although there is an increase in working capital in the form of an in- crease in accounts receivable. No net addition to cash would be shown in a sources and uses statement like Table 30.4. The increase in cash from operations would be offset by an increase in accounts receivable. Later, when the bills are paid, there is an increase in the cash balance. However, there is no further profit at this point and no increase in working capital. The in- crease in the cash balance is exactly matched by a decrease in accounts receivable. That brings up an interesting characteristic of working capital. Imagine a com- pany that conducts a very simple business. It buys raw materials for cash, processes them into finished goods, and then sells these goods on credit. The whole cycle of operations looks like this: 858 PART IX Financial Planning and Short-Term Management 5 The difference between taxes reported and paid to the Internal Revenue Service shows up on the bal- ance sheet as an increased deferred tax liability. The reason that a liability is recognized is that acceler- ated depreciation and other devices used to reduce current taxable income do not eliminate taxes; they only delay them. Of course, this reduces the present value of the firm’s tax liability, but still the ultimate liability has to be recognized. In the sources and uses statements an increase in deferred taxes would be treated as a source of funds. In the Dynamic Mattress example we ignore deferred taxes. Cash Receivables Finished goods Raw materials If you draw up a balance sheet at the beginning of the process, you see cash. If you delay a little, you find the cash replaced by inventories of raw materials and, still later, by inventories of finished goods. When the goods are sold, the inventories give way to accounts receivable, and finally, when the customers pay their bills, the firm draws out its profit and replenishes the cash balance. There is only one constant in this process, namely, working capital. The compo- nents of working capital are constantly changing. That is one reason why (net) working capital is a useful summary measure of current assets and liabilities. The strength of the working-capital measure is that it is unaffected by seasonal or other temporary movements between different current assets or liabilities. But the strength is also its weakness, for the working-capital figure hides a lot of inter- esting information. In our example cash was transformed into inventory, then into receivables, and back into cash again. But these assets have different degrees of risk and liquidity. You can’t pay bills with inventory or with receivables, you must pay with cash. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term Financial Planning © The McGraw−Hill Companies, 2003 The past is interesting only for what one can learn from it. The financial manager’s problem is to forecast future sources and uses of cash. These forecasts serve two purposes. First, they provide a standard, or budget, against which subsequent per- formance can be judged. Second, they alert the manager to future cash-flow needs. Cash, as we all know, has a habit of disappearing fast. Look, for example, at Fi- nance in the News, which describes how Ford’s large cash surplus rapidly turned into a shortage. Ford’s financial manager needed to plan for this deficiency. Preparing the Cash Budget: Inflow There are at least as many ways to produce a quarterly cash budget as there are to skin a cat. Many large firms have developed elaborate corporate models; others use a spreadsheet program to plan their cash needs. The procedures of smaller firms may be less formal. But there are common issues that all firms must face when they fore- cast. We will illustrate these issues by continuing the example of Dynamic Mattress. Most of Dynamic’s cash inflow comes from the sale of mattresses. We therefore start with a sales forecast by quarter 6 for 2002: 859 FINANCE IN THE NEWS FORD’S DISAPPEARING CASH MOUNTAIN At the end of 1998 Ford had $23.8 billion in cash and marketable securities and only $9.8 billion in debt. But in the next three years Ford went on a shopping spree that resulted in the expenditure of more than $13 billion on acquisitions, such as Volvo Cars and Land Rover. In the same period Ford spent a total of $20 billion on new products and other capital projects. Within three years Ford’s huge cash mountain had halved. By most standards Ford remained relatively con- servatively capitalized, but the outlook for the au- tomobile industry was worsening rapidly. In the first nine months of 2001 Ford recorded a loss of nearly $5 billion, so that its operations became a cash drain rather than a source of cash. At the same time the company needed to set aside $3 billion to cover potential costs associated with alleged vehi- cle safety problems. As Ford faced a potential cash shortage, the company sought to conserve cash by halving its dividend payment and pruning its capi- tal expenditure program. Source: Ford Motor’s cash drain is described in “Ford Motor’s Cash Goes Subcompact,” The Wall Street Journal, November 6, 2001. 30.4 CASH BUDGETING 6 Most firms would forecast by month instead of by quarter. Sometimes weekly or even daily forecasts are made. But presenting a monthly forecast would triple the number of entries in Table 30.7 and sub- sequent tables. We wanted to keep the examples as simple as possible. First Second Third Fourth Quarter Quarter Quarter Quarter Sales ($ millions) 87.5 78.5 116 131 [...]... Service for underpayment of taxes in previous years 4 Table 30. 12 shows Dynamic Mattress’s year-end 1999 balance sheet, and Table 30. 13 shows its income statement for 2000 Work out statements of sources and uses of cash and sources and uses of funds for 2000 Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management CHAPTER 30 Sales Operating costs... reduces the quantity of stuffing in each mattress Customers don’t notice, but operating costs fall by 10 percent (Tables 30. 2 30. 6) Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management © The McGraw−Hill Companies, 2003 30 Short−Term Financial Planning CHAPTER 30 Short-Term Financial Planning 875 d Starting in the third quarter of 2002, Dynamic... payables Stretching is one source of short-term financing, but for most firms it is an expensive Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management © The McGraw−Hill Companies, 2003 30 Short−Term Financial Planning CHAPTER 30 First Quarter Sources of cash: Collections on accounts receivable Other Total sources Uses of cash: Payments on accounts... late payment 6 Each of the following events affects one or more tables in the chapter Show the effects of each event by adjusting the tables listed in parentheses: a Dynamic repays only $2 million of short-term debt in 2001 (Tables 30. 2, 30. 4 30. 6) b Dynamic issues an additional $10 million of long-term debt in 2001 and invests $12 million in a new warehouse (Tables 30. 2, 30. 4 30. 6) c In 2001 Dynamic... loans are now relatively rare 23 Loan Pricing Corporation (www.loanpricing.com) Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management 30 Short−Term Financial Planning CHAPTER 30 © The McGraw−Hill Companies, 2003 Short-Term Financial Planning security usually consists of liquid assets such as receivables, inventories, or securities Sometimes the... departments and sell their paper directly to investors, often 28 A bank holding company is a firm that owns both a bank and nonbanking subsidiaries 870 Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management 30 Short−Term Financial Planning CHAPTER 30 © The McGraw−Hill Companies, 2003 Short-Term Financial Planning 871 Visit us at www.mhhe.com/bm7e... Ritewell Publishers Brealey−Meyers: Principles of Corporate Finance, Seventh Edition 876 IX Financial Planning and Short−Term Management © The McGraw−Hill Companies, 2003 30 Short−Term Financial Planning PART IX Financial Planning and Short-Term Management TA B L E 3 0 1 1 Cash budget for Ritewell Publishers February — — — Uses of cash: Payments of accounts payable Cash purchases of materials Other... emphasis is on cash flow You pay bills with cash, not working capital Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management 30 Short−Term Financial Planning CHAPTER 30 © The McGraw−Hill Companies, 2003 Short-Term Financial Planning 873 Here are some general textbooks on working-capital management: G W Gallinger and P B Healey: Liquidity Analysis... E, a wholesale grocer, offers a boxcar full of bananas f Firm F, an appliance dealer, offers its inventory of electric typewriters g Firm G, a jeweler, offers 100 ounces of gold h Firm H, a government securities dealer, offers its portfolio of Treasury bills i Firm I, a boat builder, offers a half-completed luxury yacht The yacht will take four months more to complete Which of these assets are most... half of the year The bottom part of Table 30. 8 (below the box) calculates how much financing Dynamic will have to raise if its cash-flow forecasts are right It starts the year with $5 million in cash There is a $46.5 million cash outflow in the first quarter, and so Dynamic will have to obtain at least $46.5 Ϫ 5 ϭ $41.5 million of additional financing Brealey−Meyers: Principles of Corporate Finance, . de- scribe the different kinds of short-term debt toward the end of the chapter. CHAPTER 30 Short-Term Financial Planning 853 30. 2 LINKS BETWEEN LONG-TERM AND SHORT-TERM FINANCING DECISIONS All. average cost of capital to its inventory of gold? (See Section 11.1.) Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30. Short−Term. million of long-term debt. 2. It reduced inventory, releasing $1 million. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 30.