Principles of Managerial Finance

CHAPTER 3 Cash Flow and Financial Planning 111

cash receipts
All of a firm’s inflows of cash in a
given financial period.

TABLE 3.7 The General Format of the Cash Budget

Jan. Feb.... Nov. Dec.

Cash receipts $XXX $XXG $XXM $XXT

Less: Cash disbursements XXA XXH... XXN XXU

Net cash flow $XXB $XXI $XXO $XXV

Add: Beginning cash XXC XXD XXJ XXP XXQ

Ending cash $XXD $XXJ $XXQ $XXW

Less: Minimum cash balance XXE XXK... XXR XXY

Required total financing $XXL $XXS

Excess cash balance $XXF $XXZ

5. Normally, it would be expected that the collection percentages would total slightly less than 100%, because some
   of the accounts receivable would be uncollectible. In this example, the sum of the collection percentages is 100%
   (20%50%30%), which reflects the fact that all sales are assumed to be collected.

Preparing the Cash Budget

The general format of the cash budget is presented in Table 3.7. We will discuss

each of its components individually.

Cash Receipts

Cash receiptsinclude all of a firm’s inflows of cash in a given financial period.

The most common components of cash receipts are cash sales, collections of

accounts receivable, and other cash receipts.

EXAMPLE Coulson Industries, a defense contractor, is developing a cash budget for Octo-

ber, November, and December. Coulson’s sales in August and September were

$100,000 and $200,000, respectively. Sales of $400,000, $300,000, and

$200,000 have been forecast for October, November, and December, respec-

tively. Historically, 20% of the firm’s sales have been for cash, 50% have gener-

ated accounts receivable collected after 1 month, and the remaining 30% have

generated accounts receivable collected after 2 months. Bad-debt expenses

(uncollectible accounts) have been negligible.^5 In December, the firm will receive

a $30,000 dividend from stock in a subsidiary. The schedule of expected cash

receipts for the company is presented in Table 3.8. It contains the following items:

Forecast sales This initial entry is merely informational.It is provided as an

aid in calculating other sales-related items.

Cash sales The cash sales shown for each month represent 20% of the total

sales forecast for that month.

Collections of A/R These entries represent the collection of accounts receiv-

able (A/R) resulting from sales in earlier months.