Cash Buget Essay

The money BudgetOne of the major functions of corporate finance is to anticipate the need for funds in the company. Although there be some(prenominal) methods for forecasting these needs, the cash budget is the most accurate (and most commonly used) method available. Cash flows by means of a company interchangeable water flows through a pipe. (See the cash flow pipeline.) A cash budget essentially maps out these cash flows and indicates the period in which they will occur. Cash budgeting, at its core, is a very simple procedure that simulates cash flowing through a company.If we can accurate estimate (1) the amounts and (2) the timing of these cash flows, then we can as well estimate whether the company will experience a shortage of cash (or an excess of cash) during any given month. The primary cash inflows for a company comprise of (1) cash sales and (2) collection of accounts receivable. An accurate sales forecast is a necessity if we be to construct an accurate cash budge t. If we then know the footing that we sell on (2/10, net 30, for example) and the past payment experience of our customers, we can estimate the amount and timing of these collections. The primary cash outflows are generally (1) payments on purchases, (2) labor costs, and (3) capital purchases (i.e., fixed assets). Other large payments may include rent, taxes, and These and other cash outflows must be estimated as to the amount and timing of the payments. professional Forma StatementsIt is also useful to know what the companys income statement will look like for the forecasted period and what the balance sheet will look like at the abate of the forecasted period. If either of these two statements show weaknesses, we can plan now to take steps that will prevent these deficiencies from occurring. Fortunately, cash budgets and pro forma statements are easily programmed using electronic spreadsheets like Microsoft Excel. This is especially handy since cash budgets involve a large numb er of relatively simple calculations.SpreadsheetsCash budgets are usually placed on an electronic spreadsheet, where data may be entered and updated frequently. The two spreadsheets below are examples of spreadsheets for 3-month and 12-month planning periods.An IllustrationLets contract a sample cash budgeting problem, with its solution. An explanation of how the numbers are determined may be seen by clicking on the appropriate links in the resolve section of this page.A SAMPLE PROBLEMGlenda Byers has gathered the data below needed for the preparation of a cash budget for the months of October, November, and December. SALES (Actual sales for imposing and September, forecasted sales for October February) August $ 45,000 September 54,000 October 65,000 November 75,000 December 93,000 January 71,000 February 55,000 Based on the past history and current credit terms offered by her firm, Glenda has estimated the following payment agenda for sales 25% of total sales will be cas h sales 60% of total sales will be collected in the month following the sale 15% of total sales will be collected in the second month following the sale . (Note get that since the three above collections total 100%, no bad debts on accounts receivable are anticipated. If we anticipated a 2% bad debt rate, we could change the 15% number above to 13%. We would then be anticipating that we would collect only 98% of the total sales.)PURCHASESThe companys markup on chronicle is two-thirds of the cost (e.g. a $40 profit on an item which cost $60.) In other words, the cost of the merchandise is 60% of the final selling price. The firm purchases enough inventory to cover sales one month in the future. Based on current creditterms, Glenda expects the following repayment schedule 12% of purchases are compensable for in cash78% are compensable one month following the purchase, and10% are paid for two months after the purchase.EXPENSES (per month, unless otherwise noted) owe Payment $ 2,30 0 Wages and Salaries 3,200 Lease Payments 750 Capital purchases (to be purchased in October) 7,600 Property Taxes (to be paid in December) 11,800 Other Expenses (%) 10% of sales FURTHER ASSUMPTIONS1. Cash* As of October 1st, the firm has $3,000 in its checking account at the bank.* The firm desires to have a minimum cash balance of $3,000 at all times.2. Loan development* As of October 1st, the companys loan balance was $2,000. * The companys bank requires that interest be paid each month. The interest to be paid is the interest due on the previous months loan balance. The interest rate is 1.0% per month on the outstanding balance at the end of the previous month. 3. Fixed Assets The firm depreciates all capital equipment purchases over a five-year period using the straight line method. 4. Minimum inventory The firm keeps $30,000 of base hit stock on hand at all times.