CASH BUDGETING




             The Cash Budget

             What is a cash budget?

             • A forecasting tool th...
The Cash Budget

             Why is a cash budget important?

             •   Allows companies to predict possible cash
...
Cash Budgeting

             REMEMBER: A business that is
             UNPROFITABLE can SURVIVE but INSOLVENCY
           ...
Cash ≠ Profit

                    Item      Effects on Cash Effect on Profit
              Fixed Assets    Payment terms:...
Methodology of the Cash Budget


             Useful tools when forecasting sales:

               • Management estimates
...
Methodology of the Cash Budget


             3. Subtract outflows from inflows to get
                net cash flow for t...
Uses of Cash Budgeting

             Implications:

               • KEY VARIABLES highlighted
               • Constant f...
Questions that Might be Asked
             Following a Cash Budget Analysis

             2. Is the overall cash flow + or...
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Cash Budgeting Lecture

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Cash Budgeting Lecture

  1. 1. CASH BUDGETING The Cash Budget What is a cash budget? • A forecasting tool that tracks all cash receipts and cash disbursements. • Done on a shorter time frame than other statements (i.e., month-by-month or even week-by week). 2007-08-15 Cash Budgeting 2 1
  2. 2. The Cash Budget Why is a cash budget important? • Allows companies to predict possible cash shortages and take corrective action before a crisis occurs. • Allows companies to see if large sums of excess cash are lying idle—could be put to better use. 2007-08-15 Cash Budgeting 3 Cash Budgeting Disregard the principles of accrual accounting when developing a cash budget: • Instead of matching EXPENSES with REVENUES in the period in which they are incurred, now we are concerned with matching CASH INFLOWS and CASH OUTFLOWS in the periods in which they are incurred. • All cash items, regardless of their classification (expense, asset, fixed cost, variable cost, etc.), are accounted for in a cash budget. Non-cash items (such as amortization) never appear. 2007-08-15 Cash Budgeting 4 2
  3. 3. Cash Budgeting REMEMBER: A business that is UNPROFITABLE can SURVIVE but INSOLVENCY (i.e., insufficient cash to pay debts) could mean BUSINESS FAILURE. 2007-08-15 Cash Budgeting 5 Cash Budgeting Example: 2007-08-15 Cash Budgeting 6 3
  4. 4. Cash ≠ Profit Item Effects on Cash Effect on Profit Fixed Assets Payment terms: Depreciate over likely year of useful life purchase Credit Sales “Age” of accounts Revenue receivable recognized when service earned Purchases on Supplier repayment Match with credit policy revenues Intangibles Payment terms Amortize over useful life 2007-08-15 Cash Budgeting 7 Methodology of the Cash Budget 1. Identify the nature and timing of all cash inflows. These include: • Inflows from financing (e.g., bank loans, capital infusions, proceeds from sale of fixed assets). Usually on a one-time basis. • Investment income collections. Sporadic. • Collections from sales (recurring over time). This may involve sales forecasts, collections schedules. 2007-08-15 Cash Budgeting 8 4
  5. 5. Methodology of the Cash Budget Useful tools when forecasting sales: • Management estimates • Historical sales patterns • Industry trends • Competitor's sales 2007-08-15 Cash Budgeting 9 Methodology of the Cash Budget 2. Identify the nature and timing of all cash outflows. These include: • Cash operating expenditures • Capital expenditures • Financial commitments • Equity reductions 2007-08-15 Cash Budgeting 10 5
  6. 6. Methodology of the Cash Budget 3. Subtract outflows from inflows to get net cash flow for the period (either a surplus or deficit). 4. Add (subtract) cash flow for the period to the ending balance in cash from the previous period to get new ending balance. 2007-08-15 Cash Budgeting 11 Uses of Cash Budgeting Schedule timing of cash flows to: • Make efficient use of cash • Analyze solvency • Forecast financial requirements • Prioritize and plan payments of outstanding accounts • Perform SENSITIVITY to plan contingency action • Categorize type of financing requirements Note: Cash budgeting involves a FUTURE orientation 2007-08-15 Cash Budgeting 12 6
  7. 7. Uses of Cash Budgeting Implications: • KEY VARIABLES highlighted • Constant fine tuning • Not perfect 2007-08-15 Cash Budgeting 13 Questions that Might be Asked Following a Cash Budget Analysis 1. What is the maximum cash requirement? In what month is it needed? Can we secure this much financing? 2007-08-15 Cash Budgeting 14 7
  8. 8. Questions that Might be Asked Following a Cash Budget Analysis 2. Is the overall cash flow + or – ? If it is negative, what can be done? 3. Which variables have the biggest impact on the cash flow? What happens if these variables change (sensitivity)? 2007-08-15 Cash Budgeting 15 Questions that Might be Asked Following a Cash Budget Analysis 4. If a negative cash flow results, what is the main cause? Is it a long-term or short-term problem? What is the best type of financing to alleviate the problem? 2007-08-15 Cash Budgeting 16 8
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