1. GEK2507 1 Compound & Prosper GEK2507 Frederick H. Willeboordse phyfhw@nus.edu.sg

2. GEK2507 2 Cash Budget Lecture 4

3. GEK2507 3 Excel Understand the Cash Budget Make a simple Cash Budget with MS-Excel Today’s Lecture

4. GEK2507 4 Excel Basics – AND The AND function is one of the basic logical functions. It returns TRUE when all the conditions are fulfilled and FALSE otherwise. One can check for as many logical conditions as one wants (well up to 30 or so … ).

5. GEK2507 5 Excel Basics – AND One can also compare words (these are often called ‘strings’ in computer lingo. However, watch out! In the formula, you need to add quotes to indicate to Excel that you are dealing with a word.

6. GEK2507 6 Excel Basics – OR The OR function is one of the basic logical functions. It returns TRUE when one or more of the conditions are fulfilled and FALSE otherwise. One can check for as many logical conditions as one wants (well up to 30 or so … ).

7. GEK2507 7 Excel Basics – SUMIF The conditional sum is very useful to extract certain data. One good example is that of commissions given in the Excel help system.

8. GEK2507 8 A Cash Budget states all the cash inflows and outflows for a certain period of time. Sometimes the cash budget is also called “Statement of budgeted cash receipts and disbursements”. A cash budget is not the same as an income statement or a cash flow statement. What is a Cash Budget?

9. GEK2507 9 Main Differences with the Income Statement: – Depreciation is not included – Loans are included – Dividends are included The Cash Budget is about “Cash”! All dollars in or out should be listed here, regardless of what they are for. What is a Cash Budget?

10. GEK2507 10 The main elements of a cash budget are: –Cash collections from customers (IN) –Cash disbursements for purchases (OUT) –Cash disbursements for operating expenses (OUT) –Capital Expenditures (OUT) –Loans (IN) –Loan repayments (OUT) As you can see everything is either IN or OUT. In that sense it’s really easy! Main Elements of a Cash Budget

11. GEK2507 11 Let us look at a company that expects the following: –Sales are expected to grow at 7% a month –20% of sales are COD (cash/check on delivery) –30% of sales are paid during the month following the sale –50% of sales are paid in the second month after the sale –Manpower and fixed costs are 20% of sales –Inventory purchases are 50% of the following month’s sales –Loan repayments of $2000 per month Indeed, this seems to be pretty complicated. Fortunately …. Sounds Complicated

12. GEK2507 12 Fortunately, it’s not as bad as it looks if we approach the problem systematically by entering all the items one by one into Excel. Let us start with entering the sales Like a vegetable stall, one by one … Fortunately not …

13. GEK2507 13 We only need the initial sales in February. The rest is calculated with a simple formula. Input Cash Budget – Enter Sales

14. GEK2507 14 This is completely derived with formulas! Enter Sales COD Receipts

15. GEK2507 15 Again, this is completely derived with formulas! Enter On-credit-sales Receipts

16. GEK2507 16 Again, this is completely derived with formulas! Enter On-credit-sales Receipts

17. GEK2507 17 Again, this is completely derived with formulas! Lucky we have a spreadsheet! Enter Totals

18. GEK2507 18 Mostly formulas, except for the loan repayments Enter Cash Outflow Note: Data from May used in April.

19. GEK2507 19 Copy and Paste the rest. Great, but ugly … let’s clean this up again. Obtain Totals

20. GEK2507 20 This is nice, but it does not really reflect the cash position. How much do we have? Cash Budget

21. GEK2507 21 The Ending Balance is an important indicator of the company’s cash position. It is calculated as: +Beginning Cash Balance +Total Collections (Total Cash IN) -Total Disbursements (Total Cash OUT) =Unadjusted Cash Balance +Current Borrowing =Ending Balance Let us add these elements to our previous Cash Balance Ending Balance

22. GEK2507 22 Ending Cash

23. GEK2507 23 Time for a nap!? Ending Cash

24. GEK2507 24 Not quite! This is nice, BUT, the assumptions are all fixed. Since almost all of the calculations are done by formulas, we can use this for investigating scenarios! Let’s take out all the numbers which were inserted manually. Scenarios!! Done?

25. GEK2507 25 Inputs Scenarios Excel does the work

26. GEK2507 26 All the numbers in the Cash Budget thus only depend on the assumptions in cells B5..I7. Now we can easily see what happens if e.g. the Growth increases to 11% and the manpower costs to 25% but the beginning cash is reduced to 1000. A Better Cash Budget

27. GEK2507 27 Cash Budget

28. GEK2507 28 Great we have achieved a lot, but we can still make this a bit better. The very least we would need to pay interest on the new loans. Also, in order to avoid bounced checks etc., we should have a minimum sum in the bank. Let us add these requirements. A Better Cash Budget

29. GEK2507 29 Cash Budget

30. GEK2507 30 How was this done? In E22, the formula used was: =IF(E21<$C$7,$C$7-E21,0) Then on a auxiliary row, the total new loans are being kept track off. The new formula for loan repayments then becomes: =$I$4+$I$5*D25 A Better Cash Budget

31. GEK2507 31 We not only accomplished budgeting for all this: –Sales are expected to grow at 7% a month –20% of sales are COD (cash/check on delivery) –30% of sales are paid during the month following the sale –50% of sales are paid in the second month after the sale –Manpower and fixed costs are 20% of sales –Inventory purchases are 50% of the following month’s sales –Loan repayments of $2000 per month But we also Amazing!

32. GEK2507 32..added: –What-IF Scenarios –Borrowing requirements –Maintenance of a minimum sum –Effects of interest of new loans on cash flow Good use of simple tools can be powerful! Amazing!

33. GEK2507 33 What-if: Growth 38%

34. GEK2507 34 Borrowing Grows rapidly! What-if: Growth 38%

35. GEK2507 35 But once it stops growing, cash flow becomes positive rapidly. What-if: Growth now 0% Of course, usually we would want to reduce the loan with (some of) the cash.

36. GEK2507 36..indeed: –New cash requirements grow rapidly –If profitability growth cannot keep pace there will be trouble –Even though profitable, this company could go bust in a cash crunch –On the other hand, if growth slows, profits may become large Good use of simple tools can be powerful! May depend on a sound analysis Amazing!

37. GEK2507 37 The Cash Budget shows the cash requirements of a company Even though the task accomplished is rather complex, it is surprisingly easy to do with Excel when doing things step by step. Key Points of the Day