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
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
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
Q1
Q2
Q3
Q4
Beginning Receivables
250
167
200
217
Sales
500
600
650
800
Cash Collections
583
567
633
750
Ending Receivables
167
200
217
267
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
• 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
Example: Cash Budget – Cash Disbursements
Payment of accounts
Wages, taxes and other expenses
Capital expenditures
Interest and dividend payments
Total cash disbursements
Q1
275
150
50
475
Q2
313
180
200
50
743
Q3
Q4
362 338
195 240
50
607
50
628
5
Example: Cash Budget – Net Cash Flow and Cash Balance
Q1
Q2
Q3
Q4
Total cash collections
583
567
633
750
Total cash disbursements
475
743
607
628
Net cash inflow
108 -176
26
122
188
12
38
Net cash inflow
108 -176
26
122
Ending cash balance
188
12
38
160
Minimum cash balance
-50
-50
-50
-50
Cumulative surplus (deficit)
138
-38
-12
110
Beginning Cash Balance
80
6
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
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
Q1
Beginning cash balance
Q2
Q3
Q4
80
188
50
50
Net cash inflow
108
(176)
26
122
Interest on short-term investment
0.15
0.69
(1.11)
(0.36)
25
13
Interest on short-term loan
Short-term borrowing repaid
Ending cash balance
188
50
50
159
Minimum cash balance
(50)
(50)
(50)
(50)
Cumulative surplus (deficit)
138
0
0
109
Beginning short-term debt
0
0
38
13
Change in short-term debt
0
38
(25)
(13)
Ending short-term debt
0
38
13
0
9