The
Net Cash Position (NCP)
The
NCP is equal to
the liquid assets
: cash, marketable securities and
short term investments
- short term borrowings :
short term bank loans
If WC > WCR :
we have a positive net cash
position
If WC < WCR : we have
a negative net cash position
(need fot short term borrowings)
The
fundamental Balance sheet equation :
static version
This relation will be used
more often in its dynamic version
(instead of its static one),
where the variations, the changes would
be considered (and not the absolute amounts).
The
fundamental Balance sheet equation : dynamic
version
Variation
NCP = Variation WC - Variation WCR |
The fundamental Balance
sheet equation leads to 3 main comments
:
The liquidity
position of a company is the result of :
- strategic
(long term) and
- operating
(short term) policies
of the firm.
What is important
- is not the level of WC
as such
- but its relation with
the WCR.
A company with a high
WC might be in financial difficulties
if its WCR are even higher.
On the other hand, a firm
with a tiny WC (or even
a negative one) might be in a good
financial position if its WCR
are even smaller (or more negative) than
its WC.
Finally, this relation will
be used more often in its dynamic
version (instead of its
static one), where the variations,
the changes would be considered (and not
the absolute amounts).
Liquidity
is a direct consequence
- of decisions
affecting the WC : strategic decisions
:
- and decisions
affecting the WCR : operating
decisions changing
Operating managers
(in the production field, or in the commercial
activities, or in purchasing functions)
influence the liquidity of the firm every
day.
Variation
NCP = Variation WC - Variation WCR
Strategic
decisions |
Operating
decisions |
|
|
NCP |
Sources :
Understanding
Financial Statements, 1999, Marc Bertonèche, Ph. D. in Finance
from the Northwestern University, Professor
at the Bordeaux University and at Sciences-PO
Paris, Visiting Professor at Harvard Business
School and Oxford University.
Corporate Finance Course,
Bernard Jaquier, Professor in Economics
& Finance, Lausanne, Switzerland, 2021