Cash Budgeting.ppt

8/13/2019 Cash Budgeting.ppt

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CASH BUDGETINGIs arrived at through a projection of future cash receipts

and cash disbursements of the firm over various intervalsof time.

It reveals the timing and amount of expected cash inflows

and outflows over the period studied.*


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PREPARATION OF THE CASH BUDGET

1.) ReceiptsThe key to the accuracy of most cash budgets is the forecast of

sales.

This forecast can be based on an internal analysis, an externalone, or both.

Internal approach- sales representatives are asked to project sales for the

forthcoming period

- the product sales manager screen these estimates and

consolidate them into sales estimates for product lines- the estimates for the various product lines then are

combined into an overall sales estimate for the firm

- internal approach can be myopic*


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PREPARATION OF THE CASH BUDGET (Receipts)

External approach- economic analysts make forecasts of the economy and

of industry sales for several years to come

- they may use regression analysis to estimate the

association between industry sales and the economy ingeneral

- after these basic predictions of business conditions and

industry sales, the next step is to estimate market share by

individual products, prices that are likely to prevail, and theexpected reception of new products*


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Schedule of Sales Receipts (The Continental Sheetmetal Company )Nov. Dec. Jan. Feb. Mar. Apr. May June

Total Sales $300,000 $350,000 $250,000 $200,000 $250,000 $300,000 $350,000 $380,000

Credit Sales 270 315,000 225,000 180,000 225,000 270,000 315,000 342,000

Collections, 1 month 243,000 283,500 202,500 162,000 202,500 243,000 283,500

Collections, 2 months 27,000 31,500 22,500 18,000 22,500 27,000

Total Collections $310,500 $234,000 $184,500 $220,500 $265,500 $310,500

Cash Sales 25,000 20,000 25,000 30,000 35,000 38,000

Total sales receipts $335,500 $254,000 $209,500 $250,500 $300,500 $348,500

If the sales forecasts are those shown in the first line of the

table shown above, we can compute a schedule of the expected

sales receipts based on the foregoing assumptions. *From this example, it is easy to see the effect of a variation

in sales on the magnitude and timing of cash receipts, all other

things being held constant.*


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PREPARATION OF THE CASH BUDGET (Receipts)

Other Receipts

In addition to the collection of sales from a product or service, cashreceipts may arise from the sale of assets, from sale of stock, from a

debt issue, from a tax refund, and from fee income.

Things of this sort are planned in advance and are predictable for

purposes of cash budgeting.*

Nov. Dec. Jan. Feb. Mar. Apr. May June

Total Sales $300,000 $350,000 $250,000 $200,000 $250,000 $300,000 $350,000 $380,000

Credit Sales 270 315,000 225,000 180,000 225,000 270,000 315,000 342,000

Collections, 1 month 243,000 283,500 202,500 162,000 202,500 243,000 283,500



Cash Sales 25,000 20,000 25,000 30,000 35,000 38,000


$40,000used equipment $294,000


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2.) Receivable Collection Period

Nov. Dec. Jan. Feb. Mar. Apr. May June

Total Sales $300,000 $350,000 $250,000 $200,000 $250,000 $300,000 $350,000 $380,000

Credit Sales 270 315,000 225,000 180,000 225,000 270,000 315,000 342,000

Collections, 1 month243,000 283,500 202,500 162,000 202,500 243,000 283,500



Cash Sales 25,000 20,000 25,000 30,000 35,000 38,000



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3.) Forecasting Disbursements

Given the sale forecast, management may choose to gearproduction closely to seasonal sales, to produce at a relatively

constant rate over time, or to have a mixed production strategy.

Once a production schedule has been established, estimates can

be made of the needs in materials, labor, and additional fixed

assets.

As with receivables, there is a lag between the time a purchase is

made and the time of actual cash payment. If suppliers give average billing terms of net 30 and the

companys policy is to pay its bills at the end of this period,

there is approximately a 1-month lag between a purchase and the

payment.*


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Schedule of Disbur sements for Purchases and Expenses

(Continental Sheetmetal Company )

There is a 1-month lag between

the time of purchase and the

payment for the purchase*

Wages are assumed to increasewith the amount of production

Wages are generally more stable

over time than are purchases.*

Dec. Jan. Feb. Mar. Apr. May June

Purchases $100,000 $80,000 $100,000 $120,000 $140,000 $150,000 $150,000

Cash Payment for

purchases 100,000 80,000 100,000 120,000 140,000 150,000

Wages 80,000 80,000 90,000 90,000 95,000 100,000

Other expenses 50,000 50,000 50,000 50,000 50,000 50,000

Total Cash expenses $230,000 $210,000 $240,000 $260,000 $285,000 $300,000

Different lags in the

collections of sales result

when the average collections

period assumption is changed


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Schedule of Cash Disbur sements (The Continental Sheetmetal

Company )In addition to cash expenses, we must take into account capital

expenditures, dividends, federal income taxes, and any other cash outflows.

Because capital expenditures are planned in advance, they usually arepredictable for the short-term cash budget.

As the forecast becomes more distant, however, prediction of these

expenditures becomes less certain.

Dividend payments for most companies are stable and are paid on

specific dates.Estimation of federal income taxes must be based on projected profits

for the period under review.

Other cash outlays might consist of the repurchase of stock or payment

of long-term debt. * Jan. Feb. Mar. Apr. May JuneTotal cash expenses $230,000 $210,000 $240,000 $260,000 $285,000 $300,000

Capital expenditures 150,000 50,000

Dividend payments 20,000 20,000

Income taxes 30,000 ______ ______ 30,000 ______ ______

Total cash disbursements $260,000 $360,000 $310,000 $290,000 $285,000 $320,000


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4.) Net Cash F low and Cash Balance

Once we are satisfied that we have taken into account allforeseeable cash inflows and outflows, we combine the cash receipts and

cash disbursements schedules to obtain the net cash inflow or outflow for

each month.

Net Cash F low and Cash Balance (Continental Sheetmetal Company)

The net cash flow may then be added to beginning cash in January,

which is assumed to be $100,000, and the projected cash position

computed month by month for the period under review.

Jan. Feb. Mar. Apr. May June

Total cash receipts $335,500 $294,000 $209,500 $250,500 $300,500 $348,500

Total cash disbursements 260,000 360,000 310,000 290,000 285,000 320,000

Net cash flow $75,500 $(66,000) $(100,500) $(39,500) $15,500 28,500

Beginning cash without financing 100,000 175,500 109,500 9,000 (30,500) (15,000)

Ending cash without financing 175,500 109,500 9,000 (30,500) (15,000) 13,500


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Net Cash F low and Cash Balance (Continental Sheetmetal Company)

The cash budget shown indicates that the company is expected to have a

cash deficit in April and May. Its deficit is caused by a decline incollections through March, capital expenditures totaling $200,000 in

February and March, and a cash dividend of $20,000 in March.

With the increase in collections in May and June, the cash balance without

financing rises to $13,500 in June.

The cash budget indicates that peak cash requirements occur in April.If the firm has a policy of maintaining a minimum cash balance of

$75,000 and of borrowing from its bank to maintain this minimum, it will

need to borrow an additional $66,000 in March. Additional borrowings will

peak at $105,500 in April, after which they will decline to $61,500 in June, if

all goes according to prediction. *

Jan. Feb. Mar. Apr. May June

Total cash receipts $335,500 $294,000 $209,500 $250,500 $300,500 $348,500

Total cash disbursements 260,000 360,000 310,000 290,000 285,000 320,000

Net cash flow $75,500 $(66,000) $(100,500) $(39,500) $15,500 28,500

Beginning cash without financing 100,000 175,500 109,500 9,000 (30,500) (15,000)

Ending cash without financing 175,500 109,500 9,000 (30,500) (15,000) 13,500


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PREPARATION OF THE CASH BUDGET5.) Deviations from Expected Cash F lows

There is a tendency to place considerable faith in the cash budgetsimply because it is expressed in numbers.

A cash budget represents merely an estimate of future cash flows.

Depending on the care devoted to preparing the budget and thevolatility of cash flows resulting from the nature of the business,

actual cash flows will deviate more or less widely from those thatwere expected.

Analyzing cash flows under only one set of assumptions, as isthe case with conventional cash budgeting, results in a faultyperspective of the future.

Take into account deviations from expected cash flows, it isdesirable to work out additional cash budgets.

It can base one cash forecast on the assumption of a maximumprobable decline in business and another on the assumption of

the maximum probable increase in business.


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From the standpoint of internal planning, it is far betterto allow for a range of possible outcomes than to rely solelyon the expected outcome. This allowance is particularlynecessary for firms whose business is relatively unstable. If acompany bases its plans on only expected cash flows, it islikely to be caught flatfooted if there is a significant deviationfrom the expected outcome. An unforeseen deficit in cash may

be difficult to finance on short notice.

Therefore, it is essential for the firm to be honest with

itself and attempt to minimize the costs associated withdeviations from expected outcomes. It may do this by takingthe steps necessary to ensure accuracy and by preparingadditional cash budgets to take into account the range ofpossible outcomes.

Documents

Cash Budgeting.ppt