Working with Funding Options
Funding Options enables you to specify how a model will behave as it attempts to balance the balance sheet in the forecast periods for a model.
You pay off debt accounts with cash from surplus accounts. You specify which surplus accounts go to which debt accounts, and the order in which they should be repaid. You can specify fund sources the company should borrow from in paying deficits. You can identify affordable dividends, handling of common and preferred stocks, and issuance or repurchase of shares.
Items that can be used to balance the model are called Funds. There are a number of different types of Funds:
- Dividends
- Assets
- Contra-Equity
- Debt (Term and Revolving)
- Preferred
- Equity
Increases in Dividends, Assets, and Contra-Equity are uses of funds, while increases in Debt, Preferred, and Equity are sources of funds. The reverse is true of decreases in the various types of Funds, so decreases in Dividends, Assets, and Contra-Equity are sources of funds; decreases in Debt, Preferred, and Equity are uses of funds.
When balancing, if there is a surplus of funds, the model looks for available uses of funds to balance; if there is a deficit of funds, then the model looks for available sources of funds to balance.
In order to guarantee that balancing can succeed (if required), a model must provide at least one source and one use of funds that has no maximum value and that can provide as large of a funding source or as large of a funding use as is required to balance. In the provided templates, these accounts are Excess Debt and Excess Marketable Securities.
For more information about the accounts used for funding options, see Funding Options Accounts, Types of Debt Accounts, and Types of Asset Accounts.
Overview of the process:
- Set options for funding accounts. See Setting Options for Funding Accounts.
- Set up a funding method. See Using Funding Methods.
- Standard funding method
- Target Capital Structure funding method
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