Chapter 13 ShortTerm Financial Planning Order Placed Order

Chapter 13 Short-Term Financial Planning Order Placed Order Received Sale Cash Received Accounts Collection < Inventory > < Receivable > < Float > Accounts < Payable > Invoice Received Disbursement < Float > Payment Sent Time ==> Cash Paid Copyright 2002 by South-Western, a division of Thomson Learning TM

Learning Objectives v Implement the six steps involved in the modeling process v Differentiate between a long-term financial planning model and short-term financial planning model v Develop a short-term financial planning model Copyright 2002 by South-Western, a division of Thomson Learning TM

Types of Models v Deterministic v Stochastic Copyright 2002 by South-Western, a division of Thomson Learning TM

Steps in Modeling Process v Determine question asked v Variable specification v Determine relationship between variables v Parameter estimation v Model validation v Model documentation Copyright 2002 by South-Western, a division of Thomson Learning TM

Percent-of-Sales Model v Needed external funds v Driving variable: sales – – – (TA/S) x S = new assets (CL/S) x S = new spontaneous financing [S x m x (1 -dpo)] = new internal equity NEF = (TA/S) x S - (CL/S) x S - [S x m x (1 -dpo)] Copyright 2002 by South-Western, a division of Thomson Learning TM

Basics of Model Building v Decide on driving variable v Temptation to make model too detailed v Build model into electronic worksheet v Use cell references to minimize model changes Copyright 2002 by South-Western, a division of Thomson Learning TM

Short-Term Financial Planning Model Copyright 2002 by South-Western, a division of Thomson Learning TM

Summary v Basics of financial modeling were discussed v A percent-of-sales model was developed to illustrate key points v Logic for a relatively sophisticated short-term financial planning model was developed v Model optimization was discussed Copyright 2002 by South-Western, a division of Thomson Learning TM