Introduction to Corporate Finance

16: Financial Planning

TABLE 16.3 SCHEDULE OF PROJECTED CASH RECEIPTS FOR FAREWELL TRADERS ($ THOUSANDS)

August September October November December

Forecast sales: $300 $600 $1,200 $900 $ 600

Cash sales (10%) $ 30 $ 60 $ 120 $ 90 $ 60

Collection of accounts receivable

Previous month (60%) $180 $ 360 $720 $ 540

Two months prior (30%) $ 90 $180 $ 360

Other cash receipts – – $ 90

Total cash receipts $ 570 $990 $ 1,050

Consider the cash receipts projections of Farewell

Traders, a lolly manufacturer, which is developing

a cash budget for October, November and

December. Farewell Traders’ sales in August

and September were $300,000 and $600,000,

respectively. The company forecasts sales of

$1,200,000, $900,000 and $600,000 for October,

November and December, respectively. Typically,

10% of Farewell Traders’ sales are cash sales and

90% are credit sales; Farewell Traders collects

about 60% of each month’s sales within the next

month, but must wait two months to collect the

remaining 30% of sales. Bad debts have been

negligible. In December, the company expects to

receive a $90,000 dividend from shares it holds in

a subsidiary.

As a first step in preparing a cash budget,

Farewell Traders prepares a schedule of projected

cash receipts (see Table 16.3). The first row shows

total sales in each month. Remember, the figures

for October–December are projections. The

second row lists cash sales in each month, which

(by assumption) equal 10% of total monthly sales.

The third and fourth rows report the expected

cash inflows from collecting receivables from the

previous two months’ sales. The next line reports

cash receipts not related to sales, and the final line

shows total cash receipts each month.

example

Cash Disbursements

Cash disbursements include all outlays of cash by the company in the period. The most common cash

disbursements are cash purchases, fixed asset outlays, payments of accounts payable, wages, interest

payments, taxes and rent and lease payments. Cash disbursements may also include items such as

dividend payments and share repurchases. It is important to remember that depreciation and other

non-cash expenses are not included in the cash budget. They are not outlays of cash, but represent a

scheduled write-off of an earlier cash outflow. (Depreciation does have a cash outflow effect through its

impact on tax payments.)

For example, consider the month of

November. Projected sales are $900,000,

implying that expected cash sales equal $90,000

(0.10 × $900,000). During November, Farewell

Traders expects to collect receivables equal to

60% of October’s $1,200,000 sales, or $720,000.

Farewell Traders also expects to collect the 30% of

September’s $600,000 sales still on the books as

receivables, or $180,000. The company expects no

other cash flows in November, so total cash

receipts equal $990,000 ($90,000 + $720,000 +

$180,000).

cash disbursements

All outlays of cash by a

company in a given period