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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 when the firm should experience cash surpluses and when it will need to borrow to cover working-capital costs

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Cash Budget


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    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

    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

    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 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. Example: Cash Budget – Cash Disbursements

    6. Example: Cash Budget – Net Cash Flow and Cash Balance 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

    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