Operating Cycle - Days Payable Recall that financing needs are related to asset turnover. The larger the cash cycle, the higher are the financing needs of the company. This shows up in asset turnover, which will be lower the higher the cash cycle. T18.7 indicates two different management approaches with respect to the cash cyle, and ultimately the investment in current assets. There are several strategies with respect to short-term financing.
Excess financing is invested in marketable securities.
Short-term borrowing is used to cover seasonal variations. A cash budget is an extremely useful tool which should be prepared in connection with pro-forma financial statements. As a practical matter, preparing both provides a way to check whether they have been prepared correctly. If the external financing number is not the same for each, then a mistake or inconsistency exists somewhere. A cash budget is simply a projection or forecast of future cash inflows and outflows.