1. The Cash Budget Lecture 4 This lecture is part of Chapter 2: Budgets, Running a Company

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

3. What is a Cash Budget 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.

4. What is a Cash Budget 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 should be listed here, regardless of what they are for.

5. Main elements of a Cash Budget 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!

6. Sounds complicated 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 ….

7. Fortunately … NOT 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 …

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

9. Enter COD Receipts This is completely derived with formulas!

10. Enter Credit-Sales Receipts Again, this is completely derived with formulas!

11. Enter Credit-Sales Receipts Again, this is completely derived with formulas!

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

13. Enter Cash Outflow Mostly formulas, except for the loan repayments

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

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

16. Ending Balance 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

17. Ending Cash

18. Time for a nap!?

19. Done? 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!!

20. Scenarios Inputs Excel does the work

21. A Better Cash Budget 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.

22. Cash Budget

23. A Better Cash Budget 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.

24. Cash Budget

25. A Better Cash Budget 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

26. Amazing! 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

27. Amazing!..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!

28. What-if: Growth 38%

29. New Borrowing Grows rapidly!

30. What-if: Growth 38% But once it stops growing, cash flow becomes positive rapidly.

31. Amazing!..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

32. Key Points of the Day 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.