Fundamentals of Financial Management (Concise 6th Edition)

482 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management

15-5 THE CASH BUDGET

Firms need to forecast their cash " ows. If they are likely to need additional cash,

they should line up funds well in advance. On the other hand, if they are likely to

generate surplus cash, they should plan for its productive use. The primary fore-

casting tool is the cash budget, illustrated in Table 15-1, which is a printout from

the chapter’s Excel model.

Cash Budget

A table that shows cash

receipts, disbursements,

and balances over some

period.

Cash Budget

A table that shows cash

receipts, disbursements,

and balances over some

period.

4 5 6 7 8 9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

A B C D E F G H I J K L M N

20%

70%

10%

0%

2%

70%

$ 15

$100

$ 10

0%

May June July August Sept Oct Nov Dec

Input Data

Collections during month of sale

Collections during 1st month after sale

Collections during 2nd month after sale

Percent bad debts

Discount on "rst month collections

Purchases as a % of next month's sales

Lease payments

Construction cost for new plant (Oct)

Target cash balance

Sales adjustment factor (change from base)

THE CASH BUDGET

Collections

During month of sale: 0.2(Sales)(0.98)

During 1st month after sale: 0.7(prior month's sales)

During 2nd month after sale: 0.1(sales 2 months ago)

Total collections

Purchases: 70% of next months sales

Payments

Payment for materials: Last month's purchases

Wages and salaries

Lease payments

Other expenses

Taxes

Payment for plant construction

Total payments

Net cash !ows:

Net cash #ow (NCF) for month: Row 25 minus Row 34

Cumulative NCF: Prior month's cum. NCF plus this month's NCF

Cash surplus (or loan requirement)

Target cash balance

Surplus cash (or loan needed): Row 37 minus Row 39

Maximum required loan (shown as a negative)

Maximum available for investment

Sales (gross)

Assumed constant. Don't change.

Assumed constant. Don't change.

Equal to 100% - (20% + 70%) - Bad debt %

Can change to see e!ects

Can change to see e!ects

Can change to see e!ects

Can change to see e!ects

Can change to see e!ects

Can change to see e!ects

% increase or decrease from base to see e!ects

$200 $250 $300 $400 $500 $350 $250 $200

$59 $78 $98 $69 $49 $39

175 210 280 350 245 175

20 25 30 40 50 35

$254 $313 $408 $459 $344 $249

$210 $280 $350 $245 $175 $140

$210 $280 $350 $245 $175 $140

30 40 50 40 30 30

15 15 15 15 15 15

10 15 20 15 10 10

30 20

100

$265 $350 $465 $415 $230 $215

($11) ($37) ($57) $44 $114 $34

($11) ($48) ($105) ($61) $53 $87

$10 $10 $10 $10 $10 $10

($21) ($58) ($115) ($71) $43 $77

($115)

$77

Tabl e 15 - 1 Allied Food Products 2009 Cash Budget (Dollars in Millions)

Notes:

a. Although the budget period is July through December, sales and purchases data for May and June are needed to determine collections and

payments during July and August.

b. Firms can both borrow and pay off commercial loans on a daily basis. So the $21 million loan shown for July would likely be borrowed

gradually on a daily basis as needed; and during October, the $115 million loan that existed at the beginning of the month would be reduced

daily to the $71 million ending balance, which, in turn, would be completely paid off sometime during November.