Principles of Corporate Finance_ 12th Edition

768 Part Nine Financial Planning and Working Capital Management

bre44380_ch29_759-786.indd 768 10/06/15 09:53 AM

The top section of Table  29.6 shows forecasted sources of cash for Dynamic Mattress.

Collection of receivables is the main source, but it is not the only one. Perhaps the firm plans

to dispose of some land or expects a tax refund or payment of an insurance claim. All such

items are included as “other” sources. It is also possible that you may raise additional capital

by borrowing or selling stock, but we don’t want to prejudge that question. Therefore, for the

moment we just assume that Dynamic will not raise further long-term finance.

Preparing the Cash Budget: Outflows

So much for the incoming cash. Now for the outgoing. There always seem to be many more

uses for cash than there are sources. For simplicity, we have condensed the uses into five cat-

egories in Table 29.6.

1. Payments on accounts payable. The firm has to pay its bills for raw materials, parts,
   electricity, etc. The cash-flow forecast assumes all these bills are paid on time, although
   Dynamic could probably delay payment to some extent. Delaying payment is sometimes
   called stretching payables. Stretching is one source of short-term financing, but for
   most firms it is an expensive source, because by stretching they lose discounts given to
   firms that pay promptly.


2. Increase in inventories. The expected increase in sales in 2016 requires additional
   investment in inventories.


3. Labor, administrative, and other expenses. This category includes all other regular
   business expenses.

Sources of cash:

Payments on accounts payable

Increase in inventory

Labor and other expenses

Capital expenditures

Taxes, interest, and dividends

Total uses

Sources minus uses

Calculation of short-term borrowing requirement:

Cash at start of period

Change in cash balance

Cash at end of period

Minimum operating balance

Cumulative financing required

Total sources

Uses of cash:

Other

Collections on accounts receivable

0

250

150

136

70

652

25

• 141


• 141


• 116
  25
  141

511

511

46

519.4

519.4

250

0

• 72.6

150

136

10

592

• 116
  
  
  • 72.6
  
  
  
  


• 188.6
  25
  213.6

46

• 68.6


• 76.7

25

101.7

170.3

807.8

807.8

261

180

136

14.5

637.5

170.3

0

46

• 188.6
  120
  
  
  • 68.6
    25
    93.6
  
  
  
  

670

267

170

136

8

46

627

120

77

747

First Quarter Second Quarter Third Quarter Fourth Quarter

❱ TABLE 29.6^ Dynamic Mattress’s cash budget for 2016 (figures in $ millions)