Cash Budget Forecast of cash inflows and outflows
Cash Budget • Forecast of cash inflows and outflows over the next short -term planning period • Primary tool in short-term financial planning • Helps determine when the firm should experience cash surpluses and when it will need to borrow to cover working-capital costs • Allows a company to plan ahead and begin the search for financing before the money is actually needed 1
Example: Cash Budget Information • Pet Treats Inc. specializes in gourmet pet treats and receives all income from sales • Sales estimates (in millions) – Q 1 = 500; Q 2 = 600; Q 3 = 650; Q 4 = 800; Q 1 next year = 550 • Accounts receivable – Beginning receivables = $250 – Average collection period = 30 days • Accounts payable – Purchases = 50% of next quarter’s sales – Beginning payables = 125 – Accounts payable period is 45 days • Other expenses – Wages, taxes, and other expense are 30% of sales – Interest and dividend payments are $50 – A major capital expenditure of $200 is expected in the second quarter • The initial cash balance is $80 and the company maintains a minimum balance of $50 2
Example: Cash Budget – Cash Collections • ACP = 30 days, this implies that 2/3 of sales are collected in the quarter made and the remaining 1/3 are collected the following quarter • Beginning receivables of $250 will be collected in the first quarter Q 1 Q 2 Q 3 Q 4 Beginning Receivables 250 167 200 217 Sales 500 650 800 Cash Collections 583 567 633 750 Ending Receivables 167 200 217 267 3
Example: Cash Budget – Cash Disbursements • Payables period is 45 days, so half of the purchases will be paid for each quarter and the remaining will be paid the following quarter • Beginning payables = $125 • Payment of accounts (rounded to nearest dollar throughout): – – Q 1: 125 +. 5(600)/2 = 275 Q 2: 150 +. 5(650)/2 = 313 Q 3: 162 +. 5(800)/2 = 362 Q 4: 200 +. 5(550)/2 = 338 4
Example: Cash Budget – Cash Disbursements Payment of accounts Wages, taxes and other expenses Capital expenditures Interest and dividend payments Total cash disbursements Q 1 275 150 Q 2 313 180 200 50 475 50 743 Q 4 362 338 195 240 50 607 50 628 5
Example: Cash Budget – Net Cash Flow and Cash Balance Q 1 Q 2 Q 3 Q 4 Total cash collections 583 567 633 750 Total cash disbursements 475 743 607 628 Net cash inflow 108 -176 26 122 188 12 38 Net cash inflow 108 -176 26 122 Ending cash balance 188 12 38 160 Minimum cash balance -50 -50 Cumulative surplus (deficit) 138 -12 110 Beginning Cash Balance 80 6
Short-Term Borrowing • Unsecured Loans – – Line of credit Committed vs. noncommitted Revolving credit arrangement Letter of credit • Secured Loans – Accounts receivable financing • Assigning • Factoring – Inventory loans • Blanket inventory lien • Trust receipt • Field warehouse financing • Commercial Paper • Trade Credit 7
Short-Term Financial Plan • Short-term funds are borrowed at 12% and interest is compounded quarterly. • Short-term surpluses (beginning cash balance – minimum cash balance) are invested at 2% and interest is compounded quarterly. 8
Q 1 Beginning cash balance Q 2 Q 3 Q 4 80 188 50 50 Net cash inflow 108 (176) 26 122 Interest on short-term investment 0. 15 0. 69 (1. 11) (0. 36) 25 13 Interest on short-term loan Short-term borrowing repaid Ending cash balance 188 50 50 159 Minimum cash balance (50) Cumulative surplus (deficit) 138 0 0 109 Beginning short-term debt 0 0 38 13 Change in short-term debt 0 38 (25) (13) Ending short-term debt 0 38 13 0 9
- Slides: 9