CHAPTER 3 Cash Flow and Financial Planning 113- Unlike the collection percentages for sales, the total of the payment percentages should equal 100%, because it is
expected that the firm will pay off all of its accounts payable.
In Practice
Given the importance of cash to
sound financial management, it is
surprising how many companies
ignore the cash-forecasting proc-
ess. Three reasons come up most
often: Cash forecasts are always
wrong, they’re hard to do, and
managers don’t see the benefits of
these forecasts unless the com-
pany is already in a cash crunch. In
addition, each company has its
own methodology for cash fore-
casting. If the firm’s cash inflows
and outflows don’t form a pattern
that managers can graph, it’s tough
to develop successful forecasts.
Yet the reasons to forecast
cash are equally compelling: Cash
forecasts provide for reliable liq-
uidity, enable a company to mini-
mize borrowing costs or maximize
investment income, and help
financial executives manage cur-
rency exposures more accurately.
In times of tight credit, lenders
expect borrowers to monitor cash
carefully and will favor a company
that prepares good cash fore-
casts. When cash needs and the
forecasted cash position don’t
match, financial managers can
plan for borrowed funds to close
the gap.
New York City–based men’s
apparel manufacturer Salant Corp.
closely integrates its financial
plans and forecasts. “Our biggest
challenge is to keep the cash fore-
cast and the projected profit and
loss in sync with the balance sheet
and vice versa,” says William R.
Bennett, vice president and trea-
surer. “We learned that the hard
way and developed our own
spreadsheet-based model.”
Although complicated to build, the
model is easy for managers to use.
Salant is a capital-intensive
operation, so its liquidity is linked
to its assets. Bennett uses theforecast of inventory and receiv-
ables as the forecast for borrowing
capacity required to meet its oper-
ating needs.
Like Salant, many companies
are using technology to demystify
cash forecasts. Software can apply
statistical techniques, graph histor-
ical data, or build models based on
each customer’s payment patterns.
It can also tap corporate databases
for the firm’s purchases and asso-
ciated payment information and
order shipments to customers and
the associated payment terms.
These data increase forecast
accuracy.
Sources:Adapted from Richard H. Gamble,
“Cash Forecast: Cloudy But Clearing,” Busi-
ness Finance(May 2001), downloaded from
http://www.businessfinancemag.com; “Profile:
Salant Corp.,” Yahoo! Finance, http://www.biz.
yahoo.com,downloaded November 19, 2001.FOCUS ONPRACTICE Cash Forecasts Needed, “Rain or Shine”
EXAMPLE Coulson Industries has gathered the following data needed for the preparation of
a cash disbursements schedule for October, November, and December.Purchases The firm’s purchases represent 70% of sales. Of this amount,
10% is paid in cash, 70% is paid in the month immediately following the
month of purchase, and the remaining 20% is paid 2 months following the
month of purchase.^6
Rent payments Rent of $5,000 will be paid each month.
Wages and salaries Fixed salary cost for the year is $96,000, or $8,000 per
month. In addition, wages are estimated as 10% of monthly sales.
Tax payments Taxes of $25,000 must be paid in December.
Fixed-asset outlays New machinery costing $130,000 will be purchased
and paid for in November.
Interest payments An interest payment of $10,000 is due in December.