|Why is Cash Planning Necessary?
- cash inflows and outflows do not occur at the same rate
throughout the operating period
- as a result, the business may have either excess cash or a
- cash surpluses should be invested in some type of
marketable security (need to consider the risk and liquidity of
- the income statement has noncash items included
- the income statement does not consider the timing of the
sales, in other words,
when do we actually receive the cash from the sale
- a cash budget forecasts cash inflows and outflows over an
- the cash budget converts an operating budget (income
to a cash position and helps management maintain the most liquid cash
for the operation at all times
- we do this because net income is NOT
indicative of the amount of cash we have available on hand
- the main objective of cash budgeting ==>
anticipate cash receipts and disbursements
|Cash Budget Equation
- BEGINNING CASH + CASH RECEIPTS -
CASH DISBURSEMENTS = ENDING CASH
- sales revenue consists of cash AND
- to develop the cash budget we need to know...
- the amount of CASH sales (usually given
as a percentage of total sales)
- the amount of current receivables we collect in the
current month as well future months (usually expressed in percentage
- cash disbursements occur when cash payments are made or
various accounts payable are paid
- to develop the cash budget we need to know...
- the amount paid for assets in the current period
(expressed as a percentage)
- the amounts paid for assets in future periods (expressed
- bank float occurs when the company's recorded cash balance
is less than the actual cash in the bank
- this can occur when there is a time lapse from when the
writes a check to when it is received and deposited by the recipient
|Minimizing Accounts Receivable Outstanding
- invoices should be mailed out promptly
- close follow-up on delinquent accounts (the older the
account the lower the chance of collecting)
- prepare a schedule of aging accounts
- typically receivables are aged into 4 periods
use a LOCK BOX collection system
- 0-30 days
- 31-60 days
- 61-90 days
- over 90 days
|Calculating Inventory Turnover
Inventory Turnover = -------------------
inventory cost = beginning inventory + purchases -
average inventory = (beginning inventory + ending
inventory) / 2
|Long-Term Cash Flow Budgeting
- need to calculate net income by taking desired cash flow
deducting depreciation expense and adding long-term principle debt
- we can use the following equation...
- Desired Cash Flow + LT Principle Payments - Depreciation
= Net Income After Tax
|Translating the Proforma into
1. How do cash flows differ from accrual-based net income
- Cash flows are the deposits made (cash inflows or
(cash outflows or “cash-outs”) from the bank account. Net income
is the excess of “recognized” revenues minus expenses, as defined by
Revenues and expenses can be recognized without cash flows occurring.
2. Why are increasing sales not always “good news”?
- With long lead times to provide goods or services, a firm
in labor, materials, and other costs for longer periods before
its cash from sales. Increasing sales may mean the company needs
to borrow large amounts of money on credit, thus increasing its costs.
3. How are cash budgeting and solvency related? What
- Solvency refers to bill-paying ability. A company is
it cannot pay its bills. Cash budgeting allows companies to plan
their cash flows to avoid insolvency.
4. Why is cash from sales not the same as sales revenue?
- Sales revenue gives rise to cash and accounts
receivable gives rise to cash only when collected. The longer the
time period between the time of sale and the receipt of the cash from
sale the more valuable cash budgeting is. Financial accounting
both cash and credit sales as sales revenue.
5. What is a cash budget, and why is it important?
6. What conditions create a need for cash budgeting?
- A cash budget tracks the flows of cash in and out of an
upon forecasts of business activities. It presents the cash flows
we expect for a future time period (e.g., a year) and the their timing
within that period (e.g., each month). Cash budgeting allows
to avoid the costs of insolvency. This is the value of any type
budgeting. Budgeting assists in a more efficient use of
With a cash budget, managers can anticipate cash flow problems and
- Uncertainty, scarce resources, long lead times, and
a need for budgeting. The more uncertainties we face, the greater the
for cash management. The fewer the resources we have the greater
the need for cash management. Certain regulatory systems, like
accounting used in nonprofit organizations, need to track the flow of
to assure government regulations are met.
collect your money as quickly as possible
hold on to your money as long as possible