Cash Flow Statement

1. BUSINESS FINANCE
FINANCIAL PLANNING
TOOLS AND CONCEPTS PT.4

2. OBJECTIVES
 TO UNDERSTAND THE IMPORTANCE OF BUDGETING
 TO CREATE AND IMPLEMENT A BUDGET
 TO DESCRIBE THE PROCESS OF CREATING A BUDGET
 TO IDENTIFYING THE PARTS OF A BUDGET

3. Financial Planning Tools
and Concepts

4. 1. Cash
Being the most liquid asset, cash is an
important amount in the balance sheet
that will affect the liquidity, and solvency
of a company.

5. 2. Motives For Holding Cash
The following are the raesons for holding
cash:
-Primary Reasons
a. Transactional
- This is the cash for paying expenses
such as salaries, utilities, rent, and
taxes, among others.

6. b. Compensating balance
- This is the cash helds to meet bank
requirements such as the minimum cash
balance you maintain for checking
accounts and if you have existing loans,
banks may also require a minimum
account of deposit with them.

7. Secondary Reasons
a. Precautionary
- This is the cash maintained for
emergencies such as the
additional cash you keep during
political and economic
uncertainties.

8. - This refers to the cash held
by the company to take
advantage of opportunities.

9. • The Cash Budget
- The cash budget provides
information regarding the
company’s expected cash receipts
and dsibursements over a given
period.

10. - It is useful for identifying future
funding requirements or excess cash
within agivin period.
-Normally, a cash budget is
prepared for a one year period broken
down into smaller intervals like
months.

12. • Basically, cash budget has the folrlowing pat:
• Cash receipts
-include all of a firm’s inflows of cash in a given financial
period.The most common components of cash receipts are cash
sales, collection of accounts receivable, and other cash receits.

13. -Illustrative Example:
B.Bugay Industries, a defense contractor, is developing a cash
budget for October,November,And December.Jugaya’s sales in
August and September were PHP100,000 and
PHP200,000respectively.Sales of PHP400,000 PHP300,000, and
PHP200,000 have been forecast for October,November, and
December respectively.

14. Historically, 20% of the firms sales have been for cash, 50% have
generated accounts recievable collected after 1 month, and
remaining 30% have generated account recievable collected
after 2 months in December, the firm will recieve a PHP30,000
dividend from stock in a subsidary.

15. Cash disbursement- include all outlays of cash by the firm during
a given financial period. The most common cash disbursement
are:
 Cash purchases
 Purchasing fixed assets
 Payments of account payable
 Internet payments
 Rent (And lease) payments
 Cash dividend payments

16. Illustrative Example:
Jugaya Industries has gathered the following data for the preparation of a cash
disbursements schedulr for October, November,and December.
-Purchase-The firm’s purchases represent 70% of sales.Of this amount, 10% is paid
in cash,70% is paid in the month immediately following the month of purchase ,
and the remaining 20% is paid 2 months following the month of purchase.
-Rent Payments- Rent of PHP5,000 will be paid each month.
-Wages and salaries-Fixed salary cost fir the year is PHP96,000, or PHP8,000 per
month. In addition, wages are estimated s 10% of monthly sales.
-Tax Payments-Taxes of PHP25,000 must be paid in December.
-Fixed Assets- New machinery costing PHP130,000 will be purchasd and paid for in
November.
-Interest Payments- An interest payment of PHP10,000 is due in December.

17. • Net Cash flow is found by subtracting the cash disbursement
from cash receipts in each period.
• The Cash Budget is part of planning. It helps mnagers
anticipate future funding requirements in order to obtain
proper finncing even before the need arises.

18. It was December 2014 and the president of DCD Corporation wants
to find out if the company has enough cash to pay the principal
balance of the company’s laon worth PHP3 million by the end of
2015. He asked the chief accountant to prepare the cash budget for
2015.
The following assumptions which will be used for the preparation of
the cash budget for 2015are as follows:
-Proeject quarterly sales for 2015 are as follows:
First quarter-Php 5 million
Second quarter-Php 7.5 million

19. Sales are collected 90% in the quarter the sales are made. The
remaining 10% is collected the following quarter.
-The cost of sales is 75% of sales. Merchandise inventories are
purchased in the quarter b these are sold.All merchandise
purchased in the quarter are paid in the same quarter.

20. -Operating expenses for each quarter paid in cash are as follows:
First quarter-PHP500,000
Second quarter-PHP750,000
Third quarter-PHP850,000
Fourth quarter-PHP1,000,000
On top of these cash operating expenses, depreciation expences
that should be charge to operation is PHP150,000 per quarter.

21. -Interest expense paid every quarter is PHP75,000.
-Income tax rate is 30%. The income taxes to be paid every quarter will be as
follows:
First quarter-PHP157,000
Second quarter-PHP270,000
Third quarter-PHP315,000
Fourth quarter-PHP382,000
Expected cash balance at the end of 2014 is about PHP350,000.For 2015,
target cash balance is raised to PHP500,000 because of expected increase in
sales.

22. 5. Account Receivable
• Acconts receivables spring out of the need to sell merchandise.
• An excellent business proposition is generate sales without
offering a credit facility to customers. However,this concept is
theoretically sound, but not sustainable.
• Credit management strategically defines the quality of account
receivables collection.

23. • The collectability of accounts receivables depends largely on
the quality of customers.
-Character-the willingness of the borrower to repay the
loan
-Capacity-a costumer’s ability to generate cash flows
-Collateral-security pledged for payment of the loan
-Capital-a costumer’s financial resources
-Condition-current economic or business conditions

24. • Proper management of accounts receivable entails having a
good billing and collection system.
-A good system should lead to the sending of statements
of account to costumers on time.
-Follow-ups through phone calls or any form of gentle
reminders should be made if costumers fail to pay on time.
• Aging of receivables is also a control measure to determine the
amount of receivables that are still outstanding and past due.

25. Current P60 million
1-30 day past due 20 million
31-60 day past due 10 million
61-90 day past due 3 million
Over 90 days past due 7 million
Total Php 100 million
• Account which have been past due for more than 90 dats have
higher probability to default.

26. 6.INVENTORY MANAGEMENT
• Inventory management involves the formulation and
administrstion of plans and policies to efficiently and
satisfactorily meet production and merchandising requirements
and minimize cost relative to inventories.
• Proper inventory management involves the determination of
reasonable levels inventories considering the size and nature of
business.

27. 7.Inventory In A Manufacturing Company
• In a manufacturing company, there are three types of inventory:
 Raw materials-these are purchased materials not yet put into
production.
 Work in process-these are goods and labor put into production
but not yet finished.
 Finished goods-these are goods put into production and
finished. These are ready to be sold.

28. 8.The ABC Analysis
• One way to control inventory is to classify inventory into a
classification system called ABC Analysis.
• Inventory classified as “A” are high valued items which should
be safeguarded the most.
• B items, on the other hand, are average-cost items that should
be safeguarded more than C items but not as much as A items.

29. 8.The ABC Analysis
• One way to control inventory is to classify inventory into a
classification system called ABC Analysis.
• Inventory classified as “A” are high valued items which should
be safeguarded the most.
• B items, on the other hand, are average-cost items that should
be safeguarded more than C items but not as much as A items.