1. 18-0 The Cash Budget 18.4 Forecast of cash inflows and outflows over the next short-term planning period Primary tool in short-term financial planning Helps determine when the firm should experience cash surpluses and when it will need to borrow to cover working-capital costs Allows a company to plan ahead and begin the search for financing before the money is actually needed LO3

2. 18-1 Example: Cash Budget Information Pet Treats Inc. specializes in gourmet pet treats and receives all income from sales Sales estimates (in millions) Q1 = 500; Q2 = 600; Q3 = 650; Q4 = 800; Q1 next year = 550 Accounts receivable Beginning receivables = $250 Average collection period = 30 days Accounts payable Purchases = 50% of next quarter’s sales Beginning payables = 125 Accounts payable period is 45 days Other expenses Wages, taxes and other expense are 25% of sales Interest and dividend payments are $50 A major capital expenditure of $200 is expected in the second quarter The initial cash balance is $100 and the company maintains a minimum balance of $50 LO3

3. 18-2 Example: Cash Budget – Cash Collections ACP = 30 days, this implies that 2/3 of sales are collected in the quarter made and the remaining 1/3 are collected the following quarter Beginning receivables of $250 will be collected in the first quarter Q1Q2Q3Q4 Beginning Receivables250167200217 Sales500600650800 Cash Collections583567633750 Ending Receivables167200217267 LO3

4. 18-3 Example: Cash Budget – Cash Disbursements Payables period is 45 days, so half of the purchases will be paid for each quarter and the remaining will be paid the following quarter Beginning payables = $125 Q1Q2Q3Q4 Payment of accounts275438362338 Wages, taxes and other expenses125150163200 Capital expenditures200 Interest and dividend payments50 Total cash disbursements450838575588 LO3

5. 18-4 Example: Cash Budget – Net Cash Flow and Cash Balance Q1Q2Q3Q4 Total cash collections583567633750 Total cash disbursements450838575588 Net cash inflow133- 271 58162 Beginning Cash Balance100233-3820 Net cash inflow133- 271 58162 Ending cash balance233-3820182 Minimum cash balance-50 Cumulative surplus (deficit)183-88-30132 LO3

6. 18-5 Short-Term Financial Plan 18.5 Q1Q2Q3Q4 Beginning cash balance10023350 Net cash inflow133-27158162 New short-term borrowing88 Interest on short-term borrowing31 Short-term borrowing repaid5533 Ending cash balance23350 178 Minimum cash balance-50 Cumulative surplus (deficit)18300128 Beginning short-term debt08833 Change in short-term debt088-55-33 Ending short-term debt088330 LO3