Short-Term Financial Planning
               A. Two Important “Cycles”
                     1.     Operating Cycle = Inventory Conversion 
                            Period + Accounts Receivable Period
                     2.     Cash Cycle = OC – Payables Deferral Period
               Dr. David P Echevarria                   All Rights Reserved                                        2
                                  CASH FLOW CYCLE
                                          (Cash Conversion Cycle)
               A. The Cash Cycle (CC) = ICP + RCP - PDP
                     1.     The Inventory Conversion Period (ICP)
                                ICP = Average Inventory / (COGS / 365)
                     2.     Receivables Collection Period (RCP)
                                RCP = Average Receivables / (Cr. Sales / 365)
                     3.     Payables Deferral Period (PDP)
                                PDP = Payables / (COGS / 365)
               Dr. David P Echevarria                   All Rights Reserved                                        3
                           CASH [FLOW] CYCLE
                            4. CC are shortened by
                                  a.  Reducing the ICP.
                                  b. Reducing the RCP.
                                  c.  Lengthening the PDP.
                                  d. The CC Equation (using a 360-day year)
                                             Inv    A/R  A/P
                                  CC =  COGS SALES COGS
                                            365        365       365
             Dr. David P Echevarria             All Rights Reserved                               4
                                  OPERATING CYCLE 
                                  CASH FLOW CYCLE
               H. Working Capital Requirements.
                     1.     Cash {WC} must be sufficient to cover the CC.
                     2.     Cash {WC} provided by Profits, Borrowing, and/or 
                            Trade Credit.
               I.  The Liquidity Paradox.
                     1.     Cash and equivalents are the least profitable assets.
                     2.     Returns on other asset investments much greater.
                     3.     Consider investment returns on;
                           a.    inventory.
                           b.    receivables.
                           c.    fixed assets.
               Dr. David P Echevarria                   All Rights Reserved                                        5
           Working Capital Management
          A. How do we finance seasonal variations?
              1.   Conservative
                   a.  High Current Ratios: > 3.0x
                   b.  Draw on excess cash
              2.   Moderate
                   a.  Industry Average CR’s: ~ 2.0x
                   b.  Use some cash and some trade credit
              3.   Aggressive
                   a.  Low Current Ratios: ~ 1.0 – 1.3x
                   b.  Rely on trade credit and borrowing S-T
           Dr. David P Echevarria       All Rights Reserved                       6
                   c.  Zero WC strategy