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Cash Budget Forecast of cash inflows and outflows over the next short-term planning period Primary tool in short-term financial planning Helps determine.

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Presentation on theme: "Cash Budget Forecast of cash inflows and outflows over the next short-term planning period Primary tool in short-term financial planning Helps determine."— Presentation transcript:

1 Cash Budget 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 1

2 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 30% 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 $80 and the company maintains a minimum balance of $50 2

3 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 3

4 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 Payment of accounts (rounded to nearest dollar throughout) : – Q1: 125 +.5(600)/2 = 275 – Q2: 150 +.5(650)/2 = 313 – Q3: 162 +.5(800)/2 = 362 – Q4: 200 +.5(550)/2 = 338 4

5 Q1Q2Q3Q4 Payment of accounts275313362338 Wages, taxes and other expenses150180195240 Capital expenditures200 Interest and dividend payments50 Total cash disbursements475743607628 Example: Cash Budget – Cash Disbursements 5

6 Example: Cash Budget – Net Cash Flow and Cash Balance Q1Q2Q3Q4 Total cash collections583567633750 Total cash disbursements475743607628 Net cash inflow108-17626122 Beginning Cash Balance801881238 Net cash inflow108-17626122 Ending cash balance1881238160 Minimum cash balance-50 Cumulative surplus (deficit)138-38-12110 6

7 Short-Term Borrowing Unsecured Loans – Line of credit – Committed vs. noncommitted – Revolving credit arrangement – Letter of credit Secured Loans – Accounts receivable financing Assigning Factoring – Inventory loans Blanket inventory lien Trust receipt Field warehouse financing Commercial Paper Trade Credit 7

8 Short-Term Financial Plan Short-term funds are borrowed at 12% and interest is compounded quarterly. Short-term surpluses (beginning cash balance – minimum cash balance) are invested at 2% and interest is compounded quarterly. 8

9 Q1Q2Q3Q4 Beginning cash balance8018850 Net cash inflow108(176)26122 Interest on short-term investment0.150.69 Interest on short-term loan(1.11)(0.36) Short-term borrowing repaid2513 Ending cash balance18850 159 Minimum cash balance(50) Cumulative surplus (deficit)13800109 Beginning short-term debt003813 Change in short-term debt038(25)(13) Ending short-term debt038130 9


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