Financial Planning & Working Capital Management | Part 10 – Principles of Corporate Finance (14th)

This comprehensive unit covers the vital frameworks of financial analysis, long-term and short-term planning, and the intricacies of managing a firm's working capital. It begins by examining how financial statements and specific ratios, such as market-to-book and market-value-added, allow stakeholders to monitor managerial performance and the accumulation of shareholder wealth. Analysts utilize the DuPont formula to break down the return on assets into the product of profit margins and asset turnover, which helps identify whether performance fluctuations stem from sales efficiency or cost management. The discussion then moves to financial planning, where the focus shifts to forecasting cash requirements through cash budgeting and navigating the links between short-term liquidity needs and long-term strategic growth. Key concepts include the internal growth rate, representing the maximum expansion possible without external financing, and the sustainable growth rate, which allows for growth while maintaining a constant debt-to-equity ratio. A significant portion of the unit details working capital management, focusing on the cash conversion cycle, which represents the time elapsed between paying for raw materials and collecting customer payments. Effective management involves optimizing inventory levels via the economic order quantity (EOQ) model or just-in-time systems, establishing sensible credit terms for customers, and utilizing electronic payment networks like Fedwire and CHIPS to maximize cash efficiency. Finally, the unit reviews the money market, describing various short-term instruments such as Treasury bills, commercial paper, and repurchase agreements that allow corporations to earn a return on idle cash balances while maintaining high liquidity.

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