CASH BUDGET (FORECAST)

1. CASH BUDGET (FORECAST) a plan for the cash inflows and outflows over a certain period of time.

2. THE CASH BUDGET IS A TOOL FOR FINANCIAL PLANNING The cash budget helps the firm to plan for the actual receipt and disbursement of cash.

3. PREPARING THE CASH BUDGET 1. The company estimates the sales for each period during the planning period

4. Month Sales for 2005 Projected Sales for 2006 January 2514 2706 February 3628 3788 March 5059 5410 April 5998 6492 May 9452 9654 June 10657 11241 July 3452 3652 August 4148 4620 September 2003 2050 October 1876 1930 November 1640 1750 December 1573 1582 Total 52000 54875 Monthly Distribution of sales for Happiness Plc. (thousands of Euros)

5. . 2. When will the sales actually generate cash? (Sales made for credit do not produce immediate cash inflows, and the cash budget must take these delays into account.) Customers’ payment habits tend to remain in the same over time.

6. Payment Month Percentage Paid Month of sale 15% Month after sale 35% Second month after sale 50%

7. Month Collected CashAmount € November 2005 15% 246000 December 2005 35% 574000 January 2006 50% 820000 Cash Receipts for November 2005 (Sales were 1640000€)

8. 3. The company use the projected sales and payment pattern to prepare the cash inflows for 2006. .

9. Projected cash inflows of sales from 2006 for Happiness plc. *The Cash budget must reflect all cash inflows. These items should also inlcude cash receipts for rent, interest, dividends.

10. 4. The firm makes a schedule of disbursements .

11. Projected Cash Disbursements for Happiness plc. 2006 (thousand of euros)

12. 5. Finally we prepare the cash budget, the projected cash inflows and disbursements will be brought together with the cash available at the beginning of the period. .

13. CASH BUDGET FOR HAPPINESS PLC. (thousand of euros)

14. Short explanations • The first line shows the beginning cash. For January is simply from the balance sheet for 2005. • The second line shows the cash inflows the company expects in each month. • Line 3 is the sum of the first and the second line, the available cash. • Line 4 is for the projected cash disbursements • To get line 5 we have to subtract from the available cash the cash disbursements. So will we get the amount of cash the company expects to have at the end of the month. (This ending cash figure would be carried forward as the beginning amount of cash for the next month.)

15. In the line 6 we have the minimum cash balance that the company like to have as a precaution against planning errors or to be sure not run out of cash • Line 7 shows any excess or shortfall of cash. A positive number (excess cash) indicates the company can invest it to a return. A negative number (needed cash) indicates the companyy must acquire money to pay its debts and to maintain its minimum cash balance.

16. SOME CASHFLOW RATIOS: Cashflow from Operating Activities (CFOA) 1. Cashflow Interest Coverage =CFOA+Interest Paid+Taxes Paid Interest Paid CFIC < 1 means the company cannot cover its interest cost through operating cashflows. This condition can lead to insolvency.

17. 2. CashFlow Return - on Investments =CFOA + Interest Total Assets - on Assests CFROI / CFROA The higher the ratio the better the company position is. CFROI < 1 means the firm earns less than 1 percent on equity and this performance will not attract any new investment capital.

18. 3. Cash Collection Ratio = Cash received from Costumers Sales Cash received from Costumers = Accounts Receivable + Sales Begining Balance – - Accounts Receivable Ending Balance CCR would be considered 100%, but this is very rarely happens due to different reasons. (Some credit sales are never collected.)

19. Kite Products makes 35 percent its sales for cash, collects 40 percent of its sales the following month, and the final 25 percent the next month.The sales figures in Kite Products for the past year: January €120000 July €660000 February €150000 August €520000 March €200000 September €380000 April €400000 October €210000 May €500000 November €100000 June €460000 December € 50000

20. Show the cash inflows generated by the sales presented above. • In planning for next year, the company expects sales to be 8 percents above last year’s level. Calculate the forecasted sales on a month-by-month basis for the next year. • If Kite Products collects 5 percent of its sales in cash, 15 percent the following month; and the final 80 percent the next month, calculate the company’s projected cash receipts for the next year.

21. Exercise: 2. Follow on making a cash budget for Happiness plc. for the rest of the year 2006. Projected Cash Disbursement for Happiness plc. 2006. (thousand of euros)

22. Exercise for Appendix (‘2’) Balance Sheet Sun Holiday For the Year Ended 31 December 2005 2004 2005 ASSETS Invested Assets Intangibles 500 400 Tangibles 10000 9500 10500 9500 Current Assets Inventories 880 720 Accounts Receivable 220 190 Marketable Securities 130 0 Cash 160 80 1390 990 Total ASSESTS 11890 10890

23. LIABILITIES (SOURCES) 2004 2005 Shareholder’s Equity Issued Capital 5000 5000 Capital Reserve 1500 1400 Other Reservers 3200 2600 Provisions 100 50 Long-Term Liabilities 500 1000 Current Liabilities Accounts Payable 590 340 Taxes Payable 400 200 Notes Payable 600 300 TOTAL LIABILITIES 11890 10890

24. Income StatementSun HolidaysFor the Year Ended 31 December 2005 (thousand of euros) Revenue 18000 Cost of goods sold (12560) Depreciation and Amortization (3200) Financial Expenses (180)___ Earnings before taxes 2060 Taxes __(2000)__ Earnings after taxes 60 Dividends (1800)____ Loss (1740) Cumulated income (O) 7000 Cumulated income (E) 5260

25. Additional information • Increase in Tangible Assets €2.700.000 • Amortization €600.000 • Expenses include the 6 percent interest of Bonds Make a Cashflow Statement for Sun Holidays using the indirect method.