FIN 534 Week 9: Working Capital Management Slide 1 Introduction Welcome to Financial Management. In this lesson we will discuss working capital management. Next slide Slide 2 Topics The following topics will be covered in this lesson: Current asset holdings; Current asset financing policies; The cash conversion cycle; The cash budget; Cash management and the target cash balance; Cash management techniques; Inventory management; Receivables management; Accruals and accounts payable (Trade Credit); Short-term marketable securities; Short-term financing; Short-term bank loans; Commercial paper; and Use of security in short-term financing. Next slide Slide 3 Current asset holdings The level of working capital required by the firm answers two questions: First, what is the correct amount of both total working capital and for each specific account? Second, how should working capital be financed? Gross working capital refers to current assets used in operations. Networking capital is given by current assets minus current liabilities. Net operating working capital or NOWC is given by current operating assets minus current operating liabilities. Usually, NOWC consists of cash required in operations, accounts receivable, and inventories minus accounts payable and accruals. When deciding upon the amount of working capital the firm focuses on operating current assets which consist of cash plus marketable securities, inventories, and accounts receivable. The level of operating current assets is a policy decision on the part of the firm and impacts profitability. Depending on its level of current operating assets the firm may run a relaxed, moderate or restrictive level of operating current assets. The optimal strategy is the one that management believes will maximize the stock’s intrinsic value. Next slide Slide 4 Current asset financing policies Any investment in operating current assets must be financed and the primary sources of funding are bank loans, accounts payable, accrued liabilities, long-term debt, and common equity. Since current assets rarely dropped to zero, companies usually have some level of permanent current operating assets which the firm needs even at the lowest point of the business cycle. Additionally, the firm has temporary operating assets which increase as sales increase during a cyclical upswing. The difference between permanent and temporary current operating assets and how they are financed is referred to as the current operating assets financing policy. The firm has three policies it may use to address this issue: First, a maturity-matching policy requires that the maturities of assets and liabilities match. Second, an aggressive policy permits the use of short-term financing for some permanent assets. And third, a conservative policy uses long-term financing for all permanent operating assets and for some of the temporary current assets. Ultimately the financing method used depends on the ...

1. FIN 534 Week 9: Working Capital Management
Slide 1
Introduction
Welcome to Financial Management. In this lesson we will
discuss working capital management.
Next slide
Slide 2
Topics
The following topics will be covered in this lesson:
Current asset holdings;
Current asset financing policies;
The cash conversion cycle;
The cash budget;
Cash management and the target cash balance;
Cash management techniques;
Inventory management;
Receivables management;
Accruals and accounts payable (Trade Credit);
Short-term marketable securities;
Short-term financing;
Short-term bank loans;
Commercial paper; and

2. Use of security in short-term financing.
Next slide
Slide 3
Current asset holdings
The level of working capital required by the firm answers two
questions:
First, what is the correct amount of both total working capital
and for each specific account?
Second, how should working capital be financed?
Gross working capital refers to current assets used in
operations. Networking capital is given by current assets minus
current liabilities. Net operating working capital or NOWC is
given by current operating assets minus current operating
liabilities. Usually, NOWC consists of cash required in
operations, accounts receivable, and inventories minus accounts
payable and accruals.
When deciding upon the amount of working capital the firm
focuses on operating current assets which consist of cash plus
marketable securities, inventories, and accounts receivable.
The level of operating current assets is a policy decision on the
part of the firm and impacts profitability. Depending on its
level of current operating assets the firm may run a relaxed,
moderate or restrictive level of operating current assets. The
optimal strategy is the one that management believes will
maximize the stock’s intrinsic value.
Next slide
Slide 4
Current asset financing policies
Any investment in operating current assets must be financed and
the primary sources of funding are bank loans, accounts
payable, accrued liabilities, long-term debt, and common equity.
Since current assets rarely dropped to zero, companies usually
have some level of permanent current operating assets which the

3. firm needs even at the lowest point of the business cycle.
Additionally, the firm has temporary operating assets which
increase as sales increase during a cyclical upswing. The
difference between permanent and temporary current operating
assets and how they are financed is referred to as the current
operating assets financing policy.
The firm has three policies it may use to address this issue:
First, a maturity-matching policy requires that the maturities of
assets and liabilities match.
Second, an aggressive policy permits the use of short-term
financing for some permanent assets.
And third, a conservative policy uses long-term financing for all
permanent operating assets and for some of the temporary
current assets.
Ultimately the financing method used depends on the manager’s
personal preference and subjective judgments.
Next slide
Slide 5
The cash conversion cycle
The cash conversion cycle, CCC, is the length of time the firm
has funds tied up in current assets and nets out the following
three time periods. The inventory conversion period, ICP, is the
time it takes to sell the equipment. Next, the average collection
period, ACP, or days sales outstanding, DSO, is enough time it
takes to collect accounts receivable. Last, the payables
deferral, PDP, is the length of time the firm’s suppliers give it
to pay for its purchases.
Then CCC equals ICP plus ACP minus PDP;
Where ICP equals inventory divided by cost of goods sold per
day;
ACP equals receivables divided by the quantity sales divided by
three hundred sixty-five.
The CCC is calculated from information contained in the first
financial statements. It is advantageous for the firm to have a

4. shorter rather than longer CCC relative to the average firm in
the industry because there is a strong relationship between the
CCC and the rate of return on the first stock. A shorter CCC
usually results in a higher the rate of return.
Next slide
Slide 6
The cash budget
The main purpose of the cash budget is to forecast the firm’s
liquidity. While the cash budget can be prepared for any time
period, firms usually use a monthly cash budget but prepare it
for a twelve month period. The firm also prepares a daily cash
budget that it uses to schedule payments on a daily basis and it
uses the monthly budget for longer – range planning.
Cash budgets are based on forecasts so the actual amount of
cash the firm needs each month can vary from the expected
amount required. Each month the firm forecasts total payments
and collections.
When the total forecasted payments are subtracted from the
total forecasted collections this yields the expected net cash
gain or loss for each month. This amount when added or
subtracted from the excess cash on hand at the beginning of the
forecast period the result is the cumulative net cash flow. This
is the amount of cash the firm has on hand if it didn’t borrow or
invest funds. If the amount is negative the firm must borrow
money but if the amount is positive the firm has surplus cash
for investment or other uses.
It is important to understand that while the cash budget, income
statement, and the FCF are related, they’re different concepts.
The cash budget reflects actual cash inflows and outflows. The
income statement reflects the firm’s profitability. FCF reflects
the after – tax operating income and the investment required to
maintain future operations.
Next slide
Slide 7

5. Cash management and the target cash balance
The firm holds cash for several reasons.
First, cash is held for transactions purposes. The firm requires
cash to make routine payments and collections. We say that
cash held for these purposes is referred to as transactions
purposes.
The firm also holds cash for precautionary balances because
cash inflows and outflows can be unpredictable.
Sometimes the firm holds compensating balances. These are
funds maintained on deposit in a bank for providing loans and
bank services.
Finally, the firm holds cash so we can take trade discounts
because suppliers may offer discounts for the early payment of
bills.
Next slide
Slide 8
Cash management techniques
Since most business is transacted by large firms that operate
nationally or globally and have funds deposited in various
banks, they must have a system to transfer funds where needed,
to arrange loans, and to invest net surpluses. There are number
of techniques the firm can use.
First, the firm may synchronize cash flows in which it times
their cash receipts to coincide with their cash outlays.
Next, with the passage of check twenty-one banks clear most
checks within one day. This speeds up the check clearing
process.
Another technique used is to manage float where flow is defined
as the difference between the balance in the firm’s checkbook
and the balance on the banks records.
If the firm uses a lockbox its incoming checks are sent to post
office boxes. The bank obtains the checks from the lockbox and
deposits them into the firm’s account.
Finally, the firm can use wire transfers or electronic debits.

6. Next slide
Slide 9
Inventory management
The goal of inventory management is to ensure there is
sufficient inventory to sustain operations and keep the cost of
ordering and carrying inventory at a minimum. If inventories
are too high, the costs associated with storage and handling,
insurance, property taxes, spoilage, and obsolescence are high.
Many firms use a just- in-time method system to reduce the
carrying costs. Carrying too little inventories can be costly as
well since the firm must order to frequently and this increases
costs. Most firms use supply chain management and closely
monitor the system.
Next slide
Slide 10
Receivables management
Managing the firm’s accounts receivable begins with the firm’s
credit policy and consists of the credit period, discounts, credit
standards, and the firm’s collection process. At any point time
the firm’s total accounts receivable is determined by the credit
sales per day and the average collection time of accounts
receivable.
The firm monitors its accounts receivable by tracking its days
sales outstanding and its average daily sales. The firm can also
use an aging schedule which breaks down accounts receivable
as to how long they have been outstanding. Using an aging
schedule shows trends so the firm can say how their collection
process compares with the average firm in the industry.
Next slide
Slide 11
Accruals and accounts payable (Trade Credit)
Accruals and accounts payable are the two major types of
operating liabilities. Accruals are short-term, interest –free
loans from employees, and the taxing authorities. As the firm’s

7. operations grow accruals automatically increase and the firm
has very little control over them.
Accounts payable or trade credit is the largest current liability.
Since trade credit results from ordinary business transactions it
also increases as the firm grows.
When the firm develops its credit policy it includes its terms of
credit which consists of two components, free trade credit
which results from the firm offering a discount and costly trade
credit which involves credit in excess of free trade credit.
Next slide
Slide 12
Short-term marketable securities
Firms hold short – term marketable securities for two reasons:
as a substitute for cash and in the form of non-operating
investment.
Usually the firm combines its marketable securities with
currency and bank deposits and refers to it as cash and cash
equivalents. These are the current assets the firm needs to
function on a daily basis. The firm chooses to hold marketable
securities because it reduces risk and transactions costs and the
firm will have cash to take advantage of growth opportunities or
bargain purchases.
The primary disadvantage to holding short-term securities is
that the after-tax return is very low. Empirical research
supports the idea that firms with high growth opportunities tend
levels of marketable securities.
In contrast, firms with high credit ratings tend to hold lower
levels of cash and marketable securities.
Next slide
Slide 13
Short-term financing
There are several advantages to using short – term credit.
First, it’s easier for the firm to obtain than long – term
financing because in the case of long-term financing lenders

8. require a detailed examination of the firm’s financial records.
Second, the firm may not want to obligate itself to long – term
debt.
Finally, short – term interest rates are usually lower than long –
term rates. Therefore, the interest rate paid on short – term
financing is usually lower.
Next slide
Slide 14
Short-term bank loans
Bank loans made to the firm include several key features. Most
of the loans made by banks or short – term in nature and mature
in one year or less. Once the loan is approved the borrower
signs a promissory note. It specifies the amount borrowed, the
interest rate, the repayment schedule, any collateral required,
and any other agree upon terms. Sometimes the bank requires a
compensating balance for bank services rendered. A
compensating balance is a minimum checking account balance
the firm maintains and is usually ten to percent of the
outstanding loan.
A line of credit with the bank which is an informal agreement
between the firm and the bank and specifies the maximum credit
the bank will extend. A revolving credit agreement is a formal,
committed line of credit and is used by large firms. It is similar
to an informal line of credit except the bank has a legal
obligation to honor the credit agreement and it receives a
commitment fee. The cost of bank loans varies for different
types of borrowers. Riskier borrowers are charged higher
interest rates. If the firm is very credit worthy it can borrow at
the prime rate. Banks charge simple interest rates on business
loans and add-on interest rates for automobile and other types
of installment loans.
Next slide
Slide 15
Commercial paper

9. Commercial paper is an unsecured promissory note issued
primarily by financial institutions to other businesses, insurance
companies, pension plans, money market mutual funds, and
banks.
Maturities on commercial paper range from one day to nine
months. Because of their short – term the rate paid is very low.
Next slide
Slide 16
Use of security in short-term financing
Commercial paper is always unsecured. While it’s better for the
firm to borrow on an unsecured basis, sometimes the firm has
no choice but to use security.
Types of security the firm can use as collateral are marketable
stocks and bonds, land, buildings, equipment, inventoried, and
accounts receivable. Land and buildings and equipment are
usually used as collateral for long – term financing while
accounts receivable and inventories are used as collateral for
short – term financing.
Next slide
Slide 17
Check your understanding
Next slide
Slide 18
Summary
We have now reached the end of this lesson. Let’s review what
we’ve covered.
First, we determined two questions concerning current asset
holdings: What is the correct amount of both total working
capital and for each specific account? And, how should working
capital be financed? The level of working capital required by
the firm answers these questions.
Next, we identified the difference between permanent and

10. temporary current operating assets and how they are financed is
referred to as the current operating assets financing policy.
Then, we defined the cash conversion cycle as the length of
time the firm has funds tied up in current assets and nets out in
three time periods: Inventory conversion period, average
collection period and days sales outstanding.
Also, we determined the main purpose of the cahs budget is to
forecast the firm’s liquidity. While the cash budget can be
prepared for any time period, firms usually use a monthly cash
budget.
Then, we introduced the concepts of target cash balance and
cash management techniques. Firms hold cash for numerous
reasons. One reason included holding cash for precautionary
balances because cash inflows and outflows can be
unpredictable. Also, since most business is transacted by large
firms operating nationally or globally, they have a system to
transfer fund where needed to arrange loans and to invest net
surpluses.
Also, we discussed inventory and receivables management. The
goal of inventory management is to ensure there is sufficient
inventory to sustain operations and keep the cost of ordering
and carrying inventory at a minimum. Receivables management
begins with the firm’s credit policy and consists of the credit
period, discounts, credit standards, and the firm’s collection
process.
Next, we identified accruals and accounts payable as the two
major types of operating liabilities.
Then, we discussed short-term marketable securities, financing,
and bank loans Short-term marketable securities are held for
two reasons: as a substitute for cash and in the form of non-
operating investment. Short-term financing has several
advantages including ease at which a firm can obtain short-term

11. credit versus long-term credit. And short-term bank loans made
to a firm include some key features such as maturing in one
year or less.
Also, we defined commercial paper as an unsecured promissory
note issued primarily by financial institution to other
businesses, insurance companies, pension plans, money market
mutual funds, and banks.
Finally, we learned that commercial paper is always unsecured.
While it’s better for the firm to borrow on an unsecured basis,
sometimes the firm has no choice but to use security.
This concludes this lesson.
FIN534 Week 9 Scenario Script: The Cash Budget
Slide #
Scene/Interaction
Narration
Slide 1
Intro Scene
Slide 2
Scene 2
· Don in front of TFC with Linda
· End of scene
FIN534_9_2_Don-1: Good day, Linda. The Dividend policy
review was fantastic. Knowing where we stand as a company
and how we can reward our shareholders is great
management/investor relations. As managers, we have certain
commitments to TFC that include shareholder wealth, but also
long term success of the company. As investors, while long
term success is good, they would like to see a return on their
investment. Being able to provide some type of return through
dividends and accruing potential stock growth is a good

12. business practice for us, especially if we have strong financials
to back it up.
As you know, we are a conservative company that may be going
through a major expansion. The board has not yet voted on the
approval of the expansion project. Two of the board members
recommended that we look at our Cash Budget.
Since we are a conservative company we always want to make
sure we are managing our cash effectively. So I would like you
to proceed with an analysis of the Cash Budget for the last half
of the year to see where we stand.
Good luck! And if you don’t mind I would like to stick around
and help out with this assignment.
FIN534_9_2_Linda-1: Don, we are looking forward to it. This
will allows us to get a better grasp on where the cash is and
where it is going. I am supposed to meet the Intern in the
conference room now. Please come and join us, as another
financial mind is always a financial plus.
<laughter>
Slide 3
Scene 3
· Linda in the conference room
· Cash Budget on Screen
· Go to next slide
· (Is the Intern in the room?)
FIN534_9_3_Linda-1: Cash budgets are important for
businesses and personal use. They can help you see where
money is coming in and going out. They can be for any length
of time or over a time frame. The more frequent the time frame
the more you will see where money is going. For example if
you create a daily budget you can see where everything is going

13. on a daily basis. But sometimes it is not necessary and monthly
budgets will be better suited as payments that are made on a
monthly basis. But ultimately it is up to the company or
individual as to what suits them best.
FIN534_9_3_Linda-2: At TFC we never really analyzed our
Cash Budget. That might seem odd for a company our size, but
we were always cash conscious so as long as we had sufficient
cash we were fine with our cash account. However, with a
project of this magnitude analyzing the Cash Budget is
important.
Slide 4
Scene 4
· Dollar Sign
· Linda speaking
FIN534_9_4_Linda-1: Since we prepared our Cash Budget for
this year, a lot has changed. The expansion project has made us
revisit our Cash Budget. It is also a time for us to look at how
we collect and pay out to see if change is needed.
We have decided to only look at the last six months of the year
to see what our cash will look like on a monthly basis.
Typically our Cash Budget would be for twelve months, but this
expansion project is an exception.
As you have noticed, when financial forms are created there is a
chance that they will be revised. A huge undertaking like this
expansion has created a need to revisit it.
There are many types of Cash Budgets and they are created to
meet the needs of the business or individual. There are a lot of
projections that go into them so it is important that we have
analyzed the projections before making a decision on what to
use.
Slide 5
· Cash Budget

14. · Show Excel file
<click of file or have it open on the side>
FIN534_9_5_Linda-1: Let’s take a deeper look into our Cash
Budget for the next six months.
At TFC we try to work with our “Body Builders”, by offering
different payment plans. We don’t offer a discount to our Body
Builders as we believe our service and offerings are the
difference with our competitors. But we do offer one month
deferral at the same price. You can call it a pay after the fact
policy.
From past history and what the Accounting Department has
supplied, fifty percent of our Body Builders pay in the current
month while forty-five percent take advantage of the one month
deferral option. The remaining five percent pay in the second
month. Also, Accounting has told us that our delinquent rate
for those “non-payers” is one percent.
FIN534_9_5_Don-1: Linda, I know we will revisit this later but
one thing that I am concerned about is the forty-five percent one
month deferral rate. What would happen if out Body Builders
decided not to pay?
FIN534_9_5_Linda-2: Don, excellent point and something we
will look at with our analysis. From our Days Sales Outstanding
ratio, we are well below the average, but this is worth some
more analysis. Before doing so, let’s look at some other entries
in the Cash Budget.
Slide 6
Scene 6
· Linda speaking – Cash Budget expenses
· Reinvestment of Dividends
· Stock Dividends

15. FIN534_9_6_Linda-1: On the payments side of our Cash
Budget, our biggest cash outflow will be for operating expenses.
We also pay taxes on a quarterly basis which does cut into our
cash account. Also we are projecting partial payment for our
expansion project in the last three months of the year.
We also projected the dividend payout at the end of the year.
We only used half of the total payout as our Cash Budget is
only for the last six months of the year.
FIN534_9_6_Linda-2: Don, let us tap into your financial mind.
What can you tell us about the Cash Budget?
Slide 7
Scene 7
· Don speaking
· Analyzing the Cash Budget
FIN534_9_7_Don-1: We would like to have a target ending
cash amount of ten million dollars, but that is going to be tough
to meet each month. In doing so, we are projecting to have
negative cash balances in two of the six months. That is a
concern. But the bigger concern is what I mentioned earlier.
Our payment plan is really beneficial to our Body Builders.
With competition being at an all time high, we need to have
creative payment plans but we also need to pay the bills! With
forty-five percent of our payments not being collected in the
current month, we are really opening ourselves up. However,
we do have a really good collection rate of ninety-nine percent.
If we can sustain that, then the forty-five percent deferred
payment to month one may not be that bad
Another area to look at is this expansion project. If TFC is
paying eight million each month, we are looking at some
negative months amounts. It also shows that our earlier month,
before the expansion, is helping in the expansion months. Also,

16. the cash dividend payment will really drain our cash account.
This, however, is expected from a cash perspective for a project
of this magnitude. But can anything be done? We are still in
negotiations with the buyers of the facilities that are part of the
expansion project. Maybe we can review some situational
analyses to see if we can strengthen our cash balance per month.
Slide 8
Scene 8 - CYU
· Don would like you to do some situational analysis to look at
the Cash Budget further
· 1) What happens if we change the $8,000 to $4,000 for the
Payment for expansion project and loans line item?
A) Cash flow is in a better position (correct answer – Correct!
By freeing up payments, TFC will be in a better cash position)
B) Cash flow is in a worse position (Nice try, but the company
was able to free up cash which will result in better cash flow in
meeting its goals.)
c) Cash flow is in the same position (Nice try, but the company
was able to free up cash which will result in better cash flow in
meeting its goals.)
· 2) - What happens to the overall cash at end of the year when
you change bad debt to 3%?
· A) Cash flow increases by $6,400 (Nice try but since the bad
debt expenses – not getting paid- went up, it will have a
negative impact on cash flows
· B) Cash flow decreases by $6,400 (Excellent! Increasing bad
debt will negatively affect cash and decrease it. Management
needs to take this into consideration when setting goals.)
· 3) What happens at end of year if we remove dividend
payment?
A) Ending cash will be $25,000
C) Ending cash will be positive $16,250 (Correct – freeing up
$25,000 will increase cash from a negative -$8,750. But is this

17. a choice that the company would want to make?)
· D) Ending cash will be negative $16,250 (Nice try but the
company was able to free up cash which will result in better
cash flow in meeting its goals)
·
· Next slide
Slide 9
Scene 9 –
· Don in room
· Disadvantages of repurchasing shares
FIN534_9_9_Don-1: Good analysis. Cash is our building block
and changes to our inflows and outflows can make a difference
to the bottom line. The last choice that was given involved
eliminating the cash dividend. While it would create a lot of
extra cash for us, that choice may not be the best.
Paying a dividend can help increase investor satisfaction and
possibly reduce agency conflicts. Maybe a better choice would
be to look at other ways TFC can increase its cash position.
The change in the payment schedule helped free up cash while
still being able to make a dividend payment. This may be a
better way to go if a suitable payment plan can be negotiated
with creditors.
As you were able to see, the Cash Budget is good for creating
those “What if?” scenarios.
FIN534_9_9_Linda-1: Don, I understand now. I know we have
always been concerned with cash but this brings it to another
level.

18. Now that we are on the Cash Budget. It looks very similar to
the income statement. Can the Cash Budget replace the income
statement?
FIN534_9_9_Don-2: Linda, very good question. The quick
answer is they are very different although they appear to be
similar. Let’s look at some of the key reasons.
Slide 10
Scene 10
· Show difference between Cash Budget and income statement
· Next screen
FIN534_9_10_Don-1: At first look you can see how the Cash
Budget and income statement could be similar but here are some
differences.
First, typically income statements are on an accrual basis,
meaning the expense or revenue is recorded when incurred not
when cash actually changes hands.
Second, Income Statements are more concerned with revenue
and not collecting the revenue. The Cash Budget focuses on the
collections piece in the form of cash.
Third, depreciation of a fixed asset is shown on an income
statement as an expense where the Cash Budget looks at the
cash transaction of the asset.
So while, they appear to look the same, they are different. They
both are important in the financial analysis of TFC and are
related in certain aspects, but there are also differences, as each
one has a specific purpose. The Income Statement looks at
profit or loss over a specific period while the Cash Budget looks
at TFC’s liquidity position in the future.
Slide 11
Scene 11

19. · CYU
· Select all the reasons how Income statements differ from Cash
Budgets
Choices:
A) Cash Budgets are recorded on a cash basis while Income
Statements record transactions on an accrual basis (Correct –
cash budgets want to see how cash is changing while income
statements are more focused on profits)
B) Depreciation Expense is recorded as an expense on Income
Statements but not with Cash Budgets. (Correct – Depreciation
is not recorded on Cash Budgets because cash is not changing
hands)
C) Dividend policy is determined but Cash Budget not Income
Statement (Incorrect – while both the Cash Budget and Income
Statement are considered when establishing the dividend policy
the Board of Directors will approve the dividend payments
D) Income Statements are more about profitability while Cash
Budgets are about liquidity (Correct – Cash budgets are
concerned about cash inflows and outflows)
· Next Slide
Slide 12
Scene 12
· Don in conference room
· Linda in conference room
FIN534_9_12_Don-1: Excellent work. Linda your Intern is
incredible.
FIN534_9_12_Linda-1: I know Don. Throughout this entire
process the Intern has been doing great work. You can tell that
Strayer University is really preparing their students in making

20. these difficult financial decisions.
FIN534_9_12_Don-2: I agree Linda. Keep in mind that the
Cash Budget that TFC prepared covers the areas of bringing in
cash and spending it. Detailed analysis is needed to help with
decision making. And our analysis has shown us that we need
to look at our payment plans to our Body Builders as well as
negotiating our capital expenditure for this expansion project.
I will be meeting with Joe later to share the results with him
FIN534_9_12_Linda-2: And let’s not forget our Board
members. If it weren’t for them we would not have analyzed
both the Dividend Policy and Cash Budget as we did. It is nice
to have an engaging Board of Directors who know what
questions to ask.
Slide 13
Scene 13
· Linda Summary slide
· Next Slide
FIN534_9_13_Linda-1: The Cash Budget is a financial form
that appears to be straightforward is more than that. As we see,
the Cash Budget is very important! It allows us to determine
how much credit can be extended before we have liquidity
problems.
We started by looking at TFC’s remaining six month Cash
Budget. Typically Cash Budgets are on a year basis but since
we want to work on the project now, we reviewed the last six
months. We learned that while the Cash Budget may look like
the Income Statement, there are a lot of differences. One of the
primary differences is that the Income Statement is usually on
an accrual basis while the Cash Budget is on a cash basis.
We also learned that detailed projections are important as they
are used to assess the overall expected cash position of TFC.

21. And any change in them can affect this expected cash position.
And let’s not forget that Income Statements are primarily
focused on profitability while Cash Budgets are focused on
liquidity.
So while TFC has many financial forms, each has a particular
emphasis. The Cash Budget focuses on the inflows and
outflows of cash. And we all know how important cash is to
TFC.
All this talk about cash has made me ready for a workout. Let's
go!
Slide 14
Scene 14
· Closing slide
Closing slide