CHAPTER 3 Cash Flow and Financial Planning 115ending cash
The sum of the firm’s beginning
cash and its net cash flow for the
period.
required total financing
Amount of funds needed by the
firm if the ending cash for the
period is less than the desired
minimum cash balance; typically
represented by notes payable.
excess cash balance
The (excess) amount available
for investment by the firm if the
period’s ending cash is greater
than the desired minimum cash
balance; assumed to be invested
in marketable securities.
net cash flow
The mathematical difference
between the firm’s cash
receipts and its cash dis-
bursements in each period.
- If Coulson either had outstanding notes payable or held marketable securities at the end of September, its “begin-
ning cash” value would be misleading. It could be either overstated or understated, depending on whether the firm
had notes payable or marketable securities on its books at that time. For simplicity, the cash budget discussions and
problems presented in this chapter assume that the firm’s notes payable and marketable securities equal $0 at the
beginning of the period of concern.
TABLE 3.10 A Cash Budget for Coulson
Industries ($000)Oct. Nov. Dec.Total cash receiptsa $210 $320 $340Less: Total cash disbursementsb (^2) (^1) (^3) (^4) (^1) (^8) (^3) (^0) (^5)
Net cash flow ($ 3) ($ 98) $ 35
Add: Beginning cash (^5) (^0) (^4) (^7) ( (^5) (^1) )
Ending cash $ 47 ($ 51) ($ 16)
Less: Minimum cash balance (^2) (^5) (^2) (^5) (^2) (^5)
Required total financing (notes payable)c —$76$41
Excess cash balance (marketable securities)d $22 — —
aFrom Table 3.8.
bFrom Table 3.9.
cValues are placed in this line when the ending cash is less than the desired minimum cash
balance. These amounts are typically financed short-term and therefore are represented by
notes payable.
dValues are placed in this line when the ending cash is greater than the desired minimum
cash balance. These amounts are typically assumed to be invested short-term and there-
fore are represented by marketable securities.
Wages and salaries These amounts were obtained by adding $8,000 to
10% of the salesin each month. The $8,000 represents the salary compo-
nent; the rest represents wages.
The remaining items on the cash disbursements schedule are self-explanatory.
Net Cash Flow, Ending Cash, Financing, and Excess Cash
Look back at the general-format cash budget in Table 3.7. We have inputs for the
first two entries, and we now continue calculating the firm’s cash needs. The
firm’s net cash flowis found by subtracting the cash disbursements from cash
receipts in each period. Then we add beginning cash to the firm’s net cash flow to
determine the ending cashfor each period. Finally, we subtract the desired mini-
mum cash balance from ending cash to find the required total financingor the
excess cash balance.If the ending cash is less than the minimum cash balance,
financingis required. Such financing is typically viewed as short-term and is
therefore represented by notes payable. If the ending cash is greater than the min-
imum cash balance, excess cashexists. Any excess cash is assumed to be invested
in a liquid, short-term, interest-paying vehicle—that is, in marketable securities.
EXAMPLE Table 3.10 presents Coulson Industries’ cash budget, based on the data already
developed. At the end of September, Coulson’s cash balance was $50,000, and its
notes payable and marketable securities equaled $0.^7 The company wishes to
maintain, as a reserve for unexpected needs, a minimum cash balance of $25,000.