1. Objectives: Explain its purpose, its components, and how it differs from the income statement. Demonstrate how Excel can be used to determine the optimal timing of major cash expenditure. Use the Scenario Manager to evaluate different assumptions in the model. Use the debugging tools to find and fix errors in formulas. Chapter 3 The Cash Budget

2. What is the Cash Budget It’s a list of the firms expected actual cash inflows and outflows over a specified period.  EXPECTED: looks forward  ACTUAL cash flows

3. Components of the Cash Budget There are 3 main components: List of expected Cash inflows (Collections)  Include all real cash inflows when they are expected, such as:  Inflows from selling the firm’s products (Revenues)  Inflows from selling any assets, bonds, stocks, etc. List of expected Cash outflows (Disbursements)  Include all real cash outflows when they are expected, such as:  Inventory purchases, any payments, dividends, taxes, interest, etc Ending cash balance  It shows the expected final cash balance for period  It includes all short-term borrowing needs and amount invested  Incorporates the payments of a principal of a loan, if applicable.

4. Differences between Cash Budget and Income Statement Cash Budget It includes only ACTUAL cash flows. Thus, non cash expenses are not included, such as:  Depreciation and amortization. Cash inflows are not just exclusive to sales. Inflows from selling assets, bonds, and/or stock could be included. Outflows that represents actual cash, such as dividends or retiring an outstanding debt should be included Forward looking Income Statement There are non cash expenses included that will affect the net income Revenues in income statement represents revenues from selling the firms products. Neither dividends nor payment of a loan principal are shown in the income statement. Looking at the past

5. Benefit of the Cash budget Because it focuses on cash income and expenditures, the cash budget is useful for : Help managers understand how cash balance fluctuate, and thus, the short-term borrowing and investment needs By knowing the these needs in advance, managers can arrange for financing/investing when needed. Also managers can also use the information in the cash budget in order to determine the best timing for major expenditure.

6. Create a complete cash budget Using the example in your books. Look at the assumption in page 68 and open ch3 workbook.