116 PART 1 Introduction to Managerial Finance
Hint Not only is the cash
budget a great tool to let man-
agement know when it has cash
shortages or excesses, but it
may be a document required by
potential creditors. It communi-
cates to them what the money
is going to be used for, and
how and when their loan will
be repaid.
Hint Because of the
uncertainty of the ending cash
values, the financial manager
will usually seek to borrow
more than the maximum
financing indicated in the cash
budget.
For Coulson Industries to maintain its required $25,000 ending cash balance,
it will need total borrowing of $76,000 in November and $41,000 in December.
In October the firm will have an excess cash balance of $22,000, which can be
held in an interest-earning marketable security. The required total financing
figures in the cash budget refer to how much will be owed at the end of the
month;they do notrepresent the monthly changes in borrowing.
The monthly changes in borrowing and in excess cash can be found by fur-
ther analyzing the cash budget. In October the $50,000 beginning cash, which
becomes $47,000 after the $3,000 net cash outflow, results in a $22,000 excess
cash balance once the $25,000 minimum cash is deducted. In November the
$76,000 of required total financing resulted from the $98,000 net cash outflow
less the $22,000 of excess cash from October. The $41,000 of required total
financing in December resulted from reducing November’s $76,000 of required
total financing by the $35,000 of net cash inflow during December. Summariz-
ing, the financial activities for each month would be as follows:October: Invest the $22,000 excess cash balance in marketable securities.
November: Liquidate the $22,000 of marketable securities and borrow
$76,000 (notes payable).
December: Repay $35,000 of notes payable to leave $41,000 of outstand-
ing required total financing.Evaluating the Cash Budget
The cash budget indicates whether a cash shortage or surplus is expected in each
of the months covered by the forecast. Each month’s figure is based on the inter-
nally imposed requirement of a minimum cash balance and represents the total
balance at the end of the month.
At the end of each of the 3 months, Coulson expects the following balances
in cash, marketable securities, and notes payable:Note that the firm is assumed first to liquidate its marketable securities to meet
deficits and then to borrow with notes payable if additional financing is needed.
As a result, it will not have marketable securities and notes payable on its books
at the same time.
Because it may be necessary to borrow up to $76,000 for the 3-month
period, the financial manager should be certain that some arrangement is made to
ensure the availability of these funds.End-of-month
balance ($000)
Account Oct. Nov. Dec.Cash $25 $25 $25
Marketable securities 22 0 0
Notes payable 0 76 41