Hi there. We have seen in the last video the discussion
on the relevant components of the balance sheet.
We still need to go through the cash behavior,
the financial needs, and the balance sheet compilation.
If companies managers don't have plans to change any policies,
then the cash behavior may not change much along the time.
If change or plan it, though,
we can follow our model proposed by Stephen Grant to estimate the cash behavior.
Here's the model adapted from his proposition.
Let's discuss the items in the table.
An aggressive collection policy will increase accounts receivables turnover,
generating a cash increase.
A less aggressive collection policy will decrease accounts
receivable turnover, generating cash decrease.
Reduced stock level or adjusting time implementation in
the production will increase inventory turnover, generating cash increase.
An increase in stock level will decrease inventory turnover, generating cash decrease.
Anticipating suppliers payment or adopting
early payment discounts will increase
accounts payable turnover, generating cash decrease.
Slowing suppliers payment or avoiding
early payments discounts will decrease accounts payable turnover,
which will generate cash increase.
Observe that analyzing the change planned for collection, accounts payment,
production model, and anticipation in receivables,
we can estimate the cash behavior.
Now, let's move on to financing needs.
The analysis on funding requirements is applied
to check if the company will require more cash.
Should the company need more cash?
There are two ways to fulfill it.
One, third party capital, a loan.
Or two, increase in equity.
A loan is the action of borrowing money from a third party, like a bank.
The company can offer part of its assets as a collateral for the loan.
We have to pay back the loan to the third party.
Therefore, the risk defer is an issue to consider before contracting it.
Typical collaterals for a loan are based on the assets of the borrower.
Common assets to consider are the accounts receivable and inventory.
The company can borrow up to a percentage of the sum of
receivables and inventory at the ending period of report.
Borrower and lender exchange communication about the borrowing base in each period.
The borrower can have a loan balance and the remaining available debt,
which is the difference between the borrowing base and the debt at that period.
In the case of equity increase,
there is no need to pay the shareholders back.
However, they expect earnings per share and the stock price increase, dividends.
So, let's discuss how to estimate the need for cash and include debt and equity funding.
Look at the table in the video.
In the table, we have the available borrowing base
which is composed by the receivables and inventory values.
Then, as we mentioned before,
the borrower and the lender set a negotiate percentage,
to be applied on the available borrowing base.
In our case, it's 65%,
the result is the value of total borrowing base as we have in the table.
We also have the preliminary cash balance estimated from the income statement.
It's called preliminary because it doesn't count on any additional financing sources,
only the company's cash.
Now, observe that the company has a total loan account of 721,000 in quarter one,
and the total borrowing base for quarter one is 871,000.
Therefore, the remaining available debt for quarter one is 110,000.
The preliminary cash balance projected for quarter one is
-260,000 and the company can borrow 110,000 in quarter one.
So, the adjusted cash with the new debt is -260,000 plus 110,000,
which results in -150,000 of adjusted cash with debt for quarter one.
Note that the company still is negative in cash,
and the projected preliminary cash balance shows that
the company cash need will increase in the budget year.
Therefore, managers have decide to sell
stocks to finance this cash debts with more equity.
We can see in the budget that they plan to issue $300,000 in new stocks.
And, with this cash from shareholders,
the ending cash balance becomes positive,
as we can see in the bottom line of the table.
Just remember, we have made some assumptions in this example.
First, we assume that the lender is comfortable to lend
money to the company up to the maximum of 65% of borrowing base.
We can assume also that the company is increasing
loan balance and cash is decreasing during the budgeted year.
So, we are considering that at any point in the future,
cash generation will start to increase,
otherwise, the company may have problems shortly.
Bank managers would be interested in knowing if this assumption is feasible.
Well, in this video,
we discussed cash behavior and financial budgeting.
In the next video,
we will move towards the balance sheet compilation.
Thanks for your attention so far.
Please follow through the steps of the course and see you soon. Bye.
Alberto Sansiviero Jr.MBA
Samantha MazzeroMSc, MBA, BS Math
Nelson YoshidaPh.D., MBA, B.Eng.
Roberto Dumas DamasM.Sc., CFA
Fernando FleuryPh.D.
