Funding Options Strategies

In funding plans, you must establish expectations for cash sources and use of excess funds from the firm's operating strategies. Funding plans might include external sources such as debt, preferred equity, common equity, or reinvestment of internal funds. It may include uses like dividends and share repurchases to treasury stock, retirement of debt or preferred equity, or investments in marketable securities.

Factors in funding activities include:

• Dividend Payout Rate

• Operating Profit margin and Net Income/Sales

• Investment in fixed and working capital required to support sales growth

• Incomes taxes

• Target Debt Capacity

Two funding methods are useful in these situations:

• Using the standard method, you may specify sources and use priority orders for funding accounts.

• Using the target capital structure method, you specify sources and uses within funding categories such as debt, preferred equity and common equity. This establishes a funding policy that manages your model's capital structure.

Each method is useful for different funding states:

• The Standard Method with a Surplus

• The Standard Method with a Deficit

• The Target Capital Structure Method PrioritiesTarget Capital Method with a Surplus

• Target Capital Method with a Deficit

The Standard Method with a Surplus

Using the standard method with forecasts resulting in cash surplus before funding, Strategic Modeling distributes the surplus using the order and priority in the Apply Cash Surplus to... list of the Standard tab. Funding accounts not in the funding lists may be forecasted like all other balance sheet accounts.

Enter accounts in the Apply Cash Surplus to... list to achieve:

• Increasing Marketable Securities

  To retain excess cash, include marketable securities in the list. You can retain funds for future investments.

• Repayment of Debt

  To pay down term debt early, include term debt in the list. This repays debt beyond the forecasted decline if surplus cash is available.

• Reduction in Revolving Balances

  To reduce outstanding balance on revolving debt, include the revolving account in the list.

• Retirement of Preferred Stock

  To apply cash to early retirement of preferred stock, include it in the list.

• Acquisition of Treasury Stock (Common Shares and New Common Shares)

  To repurchase the firm's treasury shares, include it in the list.

The Standard Method with a Deficit

When the standard method and your forecasts result in cash deficits before funding, the deficit is funded according to the order on the Fund Cash Deficits with... list of the Standard tab.

Enter accounts in the Apply Cash Surplus to... list to achieve:

• Decreasing Marketable Securities

  To use excess cash, include marketable securities in the list. Minimum requirements are honored if you select specify minimum and enter a non-zero value in the forecast for minimum marketable securities.

• Increase in Revolving Balances

  To include as a source of cash the possibility of increasing the outstanding balance on revolving debt, include the revolving account in the list.

• Issuance of Preferred Stock

  To fund deficits with Preferred equity, include the account in the list.

• Issuance of Common Stock

  If the common shares issued account is in the list, Strategic Modeling issues the number of shares at the Transaction Price for Common Shares to raise cash. The maximum number of shares authorized for sale is established in the Common Shares Issued (Year-End) account in all forecast periods.

• Sale of Treasury Stock

  Another source of corporate cash flow is the sale of treasury stock. Like issuance of common stock, the cash available from sale is determined by the number of shares available for sale and the Transaction Price for Common Shares. If you are accounting for additional paid in capital separately, enter a Par Value per Common Share of Treasury Stock.

The Target Capital Structure Method Priorities

The target capital structure method manages the priority of the category surpluses and deficits in each of up to three funding categories. When using the target capital structure, you specify a target debt capacity and, if needed, a target preferred capacity for your planning model.

Funding options enable you to specify the order of funding accounts to achieve target category levels. For example, borrowing or repayments on a revolver to meet the targeted debt capacity. Based on these forecasts and based on available funds in the forecast, Strategic Modeling applies surpluses and funds deficits in the funding category based on your funding category priorities.

Example:

Sample Company has had a successful year. Cash flow from Operations was $220 million. The total capital has increased from $1.4 billion to $1.5 billion. To maintain approximately 35% debt-to-total capital ratio, you increase debt by $35 million. If there are no forecasted increases in the debt accounts, this amount represents a deficit in the debt-funding category. It is funded according to the entries in the Fund Cash Deficits with... list.

Target Capital Method with a Surplus

If you use the Target Capital Structure method and your forecast results in a category surplus before funding, Strategic Modeling distributes the category surplus based on your funding order. Some examples:

• Affordable Dividend Affordable dividend may be used to dividend excess equity, lowering retained equity in line with the forecasted time series of debt (and preferred, if specified) capacity. This is like an increase in regular dividends or declaration and payment of special dividends to shareholders.

  Note:

  In the Target Capital Structure - Equity category, Affordable Dividend is the default balancing account in Apply Surplus and Fund Deficit.

• Repurchase of Capital Stock

  Another option when you experience an equity category surplus is to repurchase your stock from your shareholders. Shares are repurchased at the Transaction Price for Common Shares. The number of shares authorized for repurchase is established in the Treasury Shares (Year-End) account.

Target Capital Method with a Deficit

If you use the Target Capital Structure method and your forecast result in a category deficit before funding, Strategic Modeling funds the category deficit based on your funding order. Few examples:

• Issuing New Shares - Issuance of Common Stock

  To fund deficits in the equity category, you include the common shares issued account in the funding list. Strategic Modeling issues the required number of shares at the Transaction Price for Common Shares to raise equity. The maximum number of shares authorized for sale is established in the Common Shares Issued (Year-End) account in all forecast periods.

• Sale of Treasury Stock

  Another source of equity funds is the sale of treasury stock. Like issuance of common stock, the number of shares available for sale determines the equity raised from the re-issuance at the Transaction Price for Common Shares. If you are accounting for additional paid in capital separately, enter a Par Value per Common Share.