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Chapter 27: Short-Term Financial Planning


  1. The first step in short-term financial planning is to forecast future cash flows. The cash flow forecasts allow a company to determine whether it has a cash flow surplus or deficit, and whether the surplus or deficit is short-term or long-term.

  2. Firms need short-term financing to deal with seasonal working capital requirements, negative cash flow shocks, or positive cash flow shocks.

  3. The matching principle specifies that short-term needs for funds should be financed with short-term sources of funds, and long-term needs with long-term sources of funds.

  4. Bank loans are a primary source of short-term financing, especially for small firms.

    1. The most straightforward type of bank loan is a single, end-of-period payment loan.

    2. Bank lines of credit allow a firm to borrow any amount up to a stated maximum. The line of credit may be uncommitted, which is a nonbinding informal agreement, or may more typically be committed.

    3. A Bridge loan is a short-term bank loan that is used to bridge the gap until the firm can arrange for long-term financing.

  5. The number of compounding periods and other loan stipulations, such as commitment fees, loan origination fees, and compensating balance requirements, affect the effective annual rate of a bank loan.

  6. Commercial paper is a method of short-term financing that is usually available only to large, well-known firms. It is a low-cost alternative to a short-term bank loan for those firms with access to the commercial paper market.

  7. Short-term loans may also be structured as secured loans. The accounts receivable and inventory of a firm typically serve as collateral in short-term secured financing arrangements.

  8. Accounts receivable may be either pledged as security for a loan or factored. In a factoring arrangement, the accounts receivable are sold to the lender (or factor), and the firm’s customers are usually instructed to make payments directly to the factor.

  9. Inventory can be used as collateral for a loan in several ways: a floating lien (also called a general or blanket lien), a trust receipts loan (or floor planning), or a warehouse arrangement. These arrangements vary in the extent to which specific items of inventory are identified as collateral; consequently, they vary in the amount of risk the lender faces.

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