Cash Buget Essay

The inter reposition BudgetOne of the major functions of corporate finance is to anticipate the necessity for funds in the company. Although there are several methods for forecasting these needs, the interchange budget is the most accurate (and most commonly used) method available. silver flows through a company want water flows through a pipe. (See the bullion flow pipeline.) A currency budget essentially maps let out these money flows and indicates the period in which they will occur. coin budgeting, at its core, is a very simple procedure that simulates cash flowing through a company.If we drive out accurate estimate (1) the amounts and (2) the timing of these cash flows, then we can also estimate whether the company will experience a dearth of cash (or an excess of cash) during any given calendar calendar month. The aboriginal cash inflows for a company consist of (1) cash gross sales and (2) pullion of accounts receivable. An accurate sales forecast is a necessi ty if we are to construct an accurate cash budget. If we then k straight off the terms that we sell on (2/10, net 30, for example) and the ago payment experience of our customers, we can estimate the amount and timing of these collections. The primary cash outflows are generally (1) payments on purchases, (2) labor bells, and (3) chapiter purchases (i.e., immovable assets). Other large payments whitethorn include rent, taxes, and These and other cash outflows essential be estimated as to the amount and timing of the payments.Pro Forma StatementsIt is also recyclable to know what the companys income statement will look like for the forecasted period and what the equipoise sheet will look like at the end of the forecasted period. If either of these two statements show weaknesses, we can plan now to take steps that will prevent these deficiencies from occurring. Fortunately, cash budgets and pro forma statements are easily programmed using electronic spreadsheets like Microsoft Excel. This is especially handy since cash budgets involve a large number of relatively simple calculations.SpreadsheetsCash budgets are usually placed on an electronic spreadsheet, where data may be entered and updated frequently. The two spreadsheets below are examples of spreadsheets for 3-month and 12-month planning periods.An Illustrationlets consider a sample cash budgeting problem, with its solution. An explanation of how the numbers pool are determined may be seen by clicking on the enamour links in the Solution section of this page.A SAMPLE line of workGlenda Byers has gathered the data below needed for the preparation of a cash budget for the months of October, November, and December. SALES (Actual sales for August and family line, forecasted sales for October February) August $ 45,000 September 54,000 October 65,000 November 75,000 December 93,000 January 71,000 February 55,000 Based on the past history and current realization terms offered by her firm, Glend a has estimated the following payment schedule for sales 25% of total sales will be cash sales 60% of total sales will be collected in the month following the sale 15% of total sales will be collected in the second month following the sale . (Note calling card that since the three above collections total 100%, no bad debts on accounts receivable are anticipated. If we anticipated a 2% bad debt rate, we could change the 15% number above to 13%. We would then be anticipating that we would collect only 98% of the total sales.)PURCHASESThe companys markup on neckcloth is two-thirds of the cost (e.g. a $40 profit on an item which cost $60.) In other words, the cost of the merchandise is 60% of the final interchange price. The firm purchases enough inventory to cover sales one month in the future. Based on current creditterms, Glenda expects the following quittance schedule 12% of purchases are give for in cash78% are paid one month following the purchase, and10% are paid for two mon ths after the purchase.EXPENSES (per month, unless otherwise noted)Mortgage Payment $ 2,300 earnings and Salaries 3,200 Lease Payments 750 Capital purchases (to be purchased in October) 7,600 Property Taxes (to be paid in December) 11,800 Other Expenses (%) 10% of sales FURTHER ASSUMPTIONS1. Cash* As of October 1st, the firm has $3,000 in its checking account at the bank.* The firm desires to have a minimum cash balance of $3,000 at all times.2. Loan discipline* As of October 1st, the companys loan balance was $2,000. * The companys bank requires that interest be paid each month. The interest to be paid is the interest due on the previous months loan balance. The interest rate is 1.0% per month on the outstanding balance at the end of the previous month. 3. Fixed Assets The firm depreciates all capital equipment purchases over a five-year period using the straight line method. 4. token(prenominal) inventory The firm keeps $30,000 of safety stock on hand at all times.