Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-15T10:28:59.168Z Has data issue: false hasContentIssue false
  • English
  • Français

Cash Planning and Credit-Line Determination With a Financial Statement Simulator: A Case Report on Short-Term Financial Planning

Published online by Cambridge University Press:  19 October 2009

Bernell K. Stone
Get access Rights & Permissions [Opens in a new window]

Extract

This paper has presented a model for solving a central problem of short-term financial management — cash planning and credit-line determination. The core of the model is an algorithmic procedure for finding the best cash plan and the associated credit line for a given operating plan and long-term financial plan. Since the model requires a computation of cash balances, it must be embedded in a financial statement simulator.

The two keys to the model are:

1. the use of priority rankings in specifying the order in which assets and liabilities are used to change cash balances;

2. the separation of solution constraints into two classes—consistency conditions given by C1, C2, and C3 and feasibility conditions stated in C4, C5, and C6. The latter conditions require changes in the long-term plan (or the operating plan) to obtain feasibility of the short-term plan.

The use of priority rankings and the separation of solution constraints into these two classes makes possible the formulation of an algorithmic procedure that is computationally efficient and that avoids having to solve amathematical programming problem.

The benefits of the model are: (1) saved time; (2) increased accuracy in cash planning; (3) quick determination of infeasibility with respect to the short-term plan. For a firm already using financial statement simulation, the model is sufficiently easy to program and implement so that saved user time and system expense alone easily justify the cost of developing the system. Finally, a system that automatically handles short-term cash planning is critical for other areas of short-term planning, for meaningful sensitivity analysis, and for long-term financial planning for firms (such as General Recreation) for which a substantial part of the total financing is provided by either credit-line borrowing or commercial paper issuance.

Because of the similarity of both banking and financial practice across firms and banks, the basic approach used in this model is applicable to most nonfinancial corporations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 5 , December 1973 , pp. 711 - 729
Copyright
Copyright © School of Business Administration, University of Washington 1973

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Ackoff, Russell L.A Concept of Corporate Planning. New York: John Wiley & Sons, Inc., 1970.CrossRefGoogle Scholar
[2]Carleton, Willard T. “An Analytical Model for Long Range Financial Planning.” Journal of Finance, May 1970, pp. 291–315.Google Scholar
[3]Carleton, Willard T.; Dick, Charles L. Jr.; and Downes, David H.. “Converting Finance Theory into Practice: Observations from Case Histories.” Working Paper.Google Scholar
[4]Dickson, G. W.; Muriel, J. J.; and Anderson, J. C.. “Computer Assisted Planning Models: A Functional Analysis.” In Corporate Simulation Models, edited by Schrieber, Albert N.. Seattle, Wash.: College of Business Administration of the University of Washington and the College on Gaming and Simulation of the Institute of Management Science, 1970.Google Scholar
[5]Gershefski, George W.The Development and Application of a Corporate Financial Model. Oxford, Ohio: The Planning Executive Institute, 1968.Google Scholar
[6]Gershefski, George W. “Building a Corporate Financial Model.” Harvard Business Review, July–August 1969, pp. 61–72.Google Scholar
[7]Gershefski, George W. “The State of the Art.” In Corporate Simulation Models, edited by Schrieber, Albert N.. Seattle, Wash.: College of Business Administration of the University of Washington and the College on Gaming and Simulation of the Institute of Management Science, 1970.Google Scholar
[8]Naylor, Thomas H.Computer Simulation Experiments of Models of Economic Systems. New York: John Wiley and Sons, 1971.Google Scholar
[9]Schrieber, Albert N., ed. Corporate Simulation Models. Seattle, Wash.: College of Business Administration of the University of Washington and the College on Gaming and Simulation of the Institute of Management Science, 1970.Google Scholar
[10]Stone, Bernell K.; Downes, David H.; and Magee, Robert P.. “Computer-Assisted Financial Planning: The User Interface.” Working Paper, July 1973.Google Scholar
[11]Warren, James M., and Shelton, John P.. “A Simultaneous Equation Approach to Financial Planning.” Journal of Finance, December 1971, pp. 1123–1142.CrossRefGoogle Scholar