Introduction to Corporate Finance

PART 5: SPECIAL TOPICS

TABLE 16.4 SCHEDULE OF PROJECTED CASH DISBURSEMENTS FOR FAREWELL TRADERS ($THOUSANDS)

August September October November December

Purchases (70% of sales) $210 $420 $840 $ 630 $420

Cash purchases (20%) $ 42 $ 84 $168 $ 126 $ 84

Payments of accounts payable:

Previous month (60%) 126 252 504 378

Two months prior (20%) 42 84 168

Rent payments 20 20 20

Wages and salaries 150 120 90

Tax payments 5

Fixed asset outlays 390

Interest payments 30

Cash dividend payments 60

Principal payments – – 60

Total cash disbursements $692 $ 1,244 $905

example

Farewell Traders has gathered the following data

needed for the preparation of a cash disbursements

schedule for October, November and December.

• Purchases: The company’s purchases average
  70% of sales. Of this amount, Farewell Traders
  pays 20% in cash, 60% in the month following the
  purchase, and the remaining 20% two months
  following the purchase. Thus, October purchases
  are $840,000 (0.70 × $1,200,000). Of that amount,
  Farewell Traders pays $168,000 (0.20 × $840,000)
  in cash, then puts $504,000 (0.60 × $840,000) on
  account to pay in November and $168,000 (0.20 ×
  $840,000) on account to pay in December.


• Rent payments: Farewell Traders will pay rent of
  $20,000 each month.


• Wages and salaries: The company’s wages
  and salaries equal 10% of monthly sales plus
  $30,000. Thus, October’s wages and salaries will

be $150,000 [(0.10 × $1,200,000) + $30,000].

The figures for November and December are

calculated in the same manner.

• Tax payments: Farewell Traders must pay taxes of
  $75,000 in December.


• Fixed asset outlays: The company will purchase
  new machinery costing $390,000 and pay for it in
  November.


• Interest payments: An interest payment of
  $30,000 is due in December.


• Cash dividend payments: Farewell Traders will pay
  cash dividends of $60,000 in October.


• Principal payments: A $60,000 principal payment
  is due in December.
  Table 16.4 presents the company’s schedule
  of projected cash disbursements, based on the
  preceding data.

Net Cash Flow, Ending Cash, Financing Needs and Excess Cash

We can calculate the company’s net cash flow by subtracting its cash disbursements from its cash receipts

for each period. By adding the beginning cash balance to the company’s net cash flow, we determine the

ending cash balance for each period.

Like most companies, Farewell Traders does not want its cash balance to dip below some minimum

level at any time. Therefore, by subtracting the desired minimum cash balance from the ending cash

balance, we arrive at one of two results: the required total financing or the excess cash balance. If the

ending cash balance is less than the desired minimum cash balance, then the company has a short-term

financing need. The company meets this need with short-term borrowing, typically notes payable. If the