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Chapter 17 Cash and Cash Conversion Cycle

Cash is King

PLEASE NOTE: This book is currently in draft form; material is not final.

During the financial crisis of 2008 many of the very wealthy were doing the unthinkable: they were flying commercial! Instead of taking the private jet to Aspen or Monaco, the wealthy were arriving two hours early for flights and going through security (just like us commonfolk). The rich were reducing spending in other ways as well: luxury car sales were down, as were vacation home sales and purchases of art and collectables. The affluent were looking for “bargains”. Why such austere measures amongst those whose assets were valued in the millions? The collapse of financial markets and the decline in real estate values, among other factors, created a situation of having wealth on paper, but lacking liquid assets, that is, cash.

Cash flow is important in business, too. Assets on financial statements do not always translate into money available to pay workers or suppliers. The financial crisis took its toll on many companies as well and led to bankruptcies for large companies such as Lehman Brothers, General Motors, and CIT Group, Inc. Cash management is like a see-saw that companies need to balance between keeping cash on hand and investing in assets. They need enough cash to be liquid enough to pay suppliers and please creditors, but demanding too much cash from investors can increase financing costs. In this chapter we discuss the cash flow of a firm, including taxes, and describe techniques that can be used to forecast future cash production or need.

Financial Planning

Learning Objectives

  1. Describe a corporate financial plan.
  2. Distinguish and explain the difference between short-term and long-term plans.

Proper financial planning is key to any financial manager’s success. Financial planning is a process involving analyzation of the existing state of financial affairs and a realistic estimation of the future. Companies review current assets, expenses, income and sales and try to estimate potential opportunities and challenges. This analysis is compiled into a financial plan. A financial planAn evaluation of a company’s current financial state and a plan for the future. is an evaluation of a company’s current financial state and a projection for the future. Financial plans are either short-term, covering a 1–2 year period or long-term, typically two to ten years. Many companies (and universities and non-profits and others) use a five year plan and update it as needed. Without a solid financial plan, a new product or plant addition may not come to frutition.

There are two components to corporate financial planning: planning for cash flows and planning for profits. The first step is cash budget planning (remember cash is king). A good cash budget becomes the foundation for a profit plan. The second step is planning for profits. The profit plan involves pro forma statements. A pro forma statement is projected figures for a company to use in the financial planning process. Pro forma statements require more in depth analysis and are covered in a separate chapter. In this chapter we focus on cash. There are many parts involved with cash and its management. We begin here with cash budgeting.

Key Takeaways

  • A financial plan is an assessment of a company’s current financial situation and a projection of their future situation.
  • Short-term plans are 1–2 years and long-term plans are typically 2–10 years.


  1. Why does a company need a financial plan?
  2. In what ways is a corporate financial plan similar to a personal financial plan? Do you have a personal financial plan? If not, do you have plans to create one?