This chapter has introduced the management of short-term finance. Short-term finance involves short-lived assets and liabilities. We trace and examine the short-term sources and uses of cash as they appear on the firm's financial statements. We see how current assets and current liabilities arise in the short-term operating activities and the cash cycle of the firm.
Managing short-term cash flows involves the minimizing of costs. The two major costs are carrying costs, the return forgone by keeping too much invested in short-term assets such as cash, and shortage costs, the cost of running out of short-term assets. The objective of managing short-term finance and doing short-term financial planning is to find the optimal trade-off between these two costs.
In an ideal economy, the firm could perfectly predict its short-term uses and sources of cash, and net working capital could be kept at zero. In the real world we live in, cash and net working capital provide a buffer that lets the firm meet its ongoing obligations. The financial manager seeks the optimal level of each of the current assets.
The financial manager can use the cash budget to identify short-term financial needs. The cash budget tells the manager what borrowing is required or what lending will be possible in the short run. The firm has available to it a number of possible ways of acquiring funds to meet short-term shortfalls, including unsecured and secured loans.
