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

Abstract

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 a mathematical 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.