Managerial Accounting
Class Notes and Lecture Outline
Cash Management 
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 shortage
  • cash surpluses should be invested in some type of short-term marketable security  (need to consider the risk and liquidity of the investment)
  • 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
Cash Budgeting
  • a cash budget forecasts cash inflows and outflows over an operating period
  • the cash budget converts an operating budget (income statement) to a cash position and helps management maintain the most liquid cash position 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
Cash Receipts
  • sales revenue consists of cash AND receivables
  • to develop the cash budget we need to know...
    1. the amount of CASH sales (usually given as a percentage of total sales)
    2. the amount of current receivables we collect in the current month as well future months (usually expressed in percentage terms)
Cash Disbursements
  • cash disbursements occur when cash payments are made or various accounts payable are paid
  • to develop the cash budget we need to know...
    1. the amount paid for assets in the current period (expressed as a percentage)
    2. the amounts paid for assets in future periods (expressed as percentages)
Bank Float
  • 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 company 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
      1. 0-30 days
      2. 31-60 days
      3. 61-90 days
      4. over 90 days
  • use a LOCK BOX collection system
Calculating Inventory Turnover
                         inventory cost
Inventory Turnover  =  -------------------
                        average inventory

    inventory cost = beginning inventory + purchases - ending inventory
    average inventory = (beginning inventory + ending inventory) / 2

Long-Term Cash Flow Budgeting
  • need to calculate net income by taking desired cash flow and deducting depreciation expense and adding long-term principle debt payments
  • we can use the following equation...
    • Desired Cash Flow + LT Principle Payments - Depreciation  =  Net Income After Tax
Translating the Proforma into a Cash Budget

1. How do cash flows differ from accrual-based net income reported on financial statements?

  • Cash flows are the deposits made (cash inflows or “cash-ins”) and withdrawals (cash outflows or “cash-outs”) from the bank account.  Net income is the excess of “recognized” revenues minus expenses, as defined by GAAP.  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 needs to invest in labor, materials, and other costs for longer periods before receiving 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 does insolvency mean?

  • Solvency refers to bill-paying ability.  A company is insolvent when 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.  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 the sale the more valuable cash budgeting is.  Financial accounting recognizes both cash and credit sales as sales revenue.

5. What is a cash budget, and why is it important?

  • A cash budget tracks the flows of cash in and out of an organization based 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 organizations to avoid the costs of insolvency.  This is the value of any type of budgeting.  Budgeting assists in a more efficient use of resources.  With a cash budget, managers can anticipate cash flow problems and adjust accordingly.
6. What conditions create a need for cash budgeting?
  • Uncertainty, scarce resources, long lead times, and cyclical demand create a need for budgeting. The more uncertainties we face, the greater the need for cash management.  The fewer the resources we have the greater the need for cash management.  Certain regulatory systems, like fund accounting used in nonprofit organizations, need to track the flow of cash to assure government regulations are met.
Cash Management Motto
collect your money as quickly as possible
hold on to your money as long as possible

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this page is maintained by Reed Fisher
last updated January 15, 2011