768 Part Nine Financial Planning and Working Capital Management
bre44380_ch29_759-786.indd 768 10/06/15 09:53 AM
The top section of Table 29.6 shows forecasted sources of cash for Dynamic Mattress.
Collection of receivables is the main source, but it is not the only one. Perhaps the firm plans
to dispose of some land or expects a tax refund or payment of an insurance claim. All such
items are included as “other” sources. It is also possible that you may raise additional capital
by borrowing or selling stock, but we don’t want to prejudge that question. Therefore, for the
moment we just assume that Dynamic will not raise further long-term finance.
Preparing the Cash Budget: Outflows
So much for the incoming cash. Now for the outgoing. There always seem to be many more
uses for cash than there are sources. For simplicity, we have condensed the uses into five cat-
egories in Table 29.6.
- Payments on accounts payable. The firm has to pay its bills for raw materials, parts,
electricity, etc. The cash-flow forecast assumes all these bills are paid on time, although
Dynamic could probably delay payment to some extent. Delaying payment is sometimes
called stretching payables. Stretching is one source of short-term financing, but for
most firms it is an expensive source, because by stretching they lose discounts given to
firms that pay promptly. - Increase in inventories. The expected increase in sales in 2016 requires additional
investment in inventories. - Labor, administrative, and other expenses. This category includes all other regular
business expenses.
Sources of cash:
Payments on accounts payable
Increase in inventory
Labor and other expenses
Capital expenditures
Taxes, interest, and dividends
Total uses
Sources minus uses
Calculation of short-term borrowing requirement:
Cash at start of period
Change in cash balance
Cash at end of period
Minimum operating balance
Cumulative financing required
Total sources
Uses of cash:
Other
Collections on accounts receivable
0
250
150
136
70
652
25
- 141
- 141
- 116
25
141
511
511
46
519.4
519.4
250
0
- 72.6
150
136
10
592
- 116
- 72.6
- 188.6
25
213.6
46
- 68.6
- 76.7
25
101.7
170.3
807.8
807.8
261
180
136
14.5
637.5
170.3
0
46
- 188.6
120- 68.6
25
93.6
- 68.6
670
267
170
136
8
46
627
120
77
747
First Quarter Second Quarter Third Quarter Fourth Quarter
❱ TABLE 29.6^ Dynamic Mattress’s cash budget for 2016 (figures in $ millions)