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    Cash Planning

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    Elaine Mateo
    The document discusses cash budgets and cash flow forecasting. It explains that cash budgets are important for identifying potential cash flow problems in advance. They should be prepared at least monthly, but larger businesses may do it weekly or daily. The document then provides details on how to prepare a cash budget, including forecasting sales and accounting for beginning cash, net cash flow, ending cash, minimum cash needs, required financing, and excess cash. It also discusses ways to cope with uncertainty, such as scenario analysis and simulation modeling.

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    Cash Planning

    Uploaded by

    Elaine Mateo
    447 views3 pages
    The document discusses cash budgets and cash flow forecasting. It explains that cash budgets are important for identifying potential cash flow problems in advance. They should be prepared at least monthly, but larger businesses may do it weekly or daily. The document then provides details on how to prepare a cash budget, including forecasting sales and accounting for beginning cash, net cash flow, ending cash, minimum cash needs, required financing, and excess cash. It also discusses ways to cope with uncertainty, such as scenario analysis and simulation modeling.

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    The document discusses cash budgets and cash flow forecasting. It explains that cash budgets are important for identifying potential cash flow problems in advance. They should be prepared at least monthly, but larger businesses may do it weekly or daily. The document then provides details on how to prepare a cash budget, including forecasting sales and accounting for beginning cash, net cash flow, ending cash, minimum cash needs, required financing, and excess cash. It also discusses ways to cope with uncertainty, such as scenario analysis and simulation modeling.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    447 views3 pages

    Cash Planning

    Uploaded by

    Elaine Mateo
    The document discusses cash budgets and cash flow forecasting. It explains that cash budgets are important for identifying potential cash flow problems in advance. They should be prepared at least monthly, but larger businesses may do it weekly or daily. The document then provides details on how to prepare a cash budget, including forecasting sales and accounting for beginning cash, net cash flow, ending cash, minimum cash needs, required financing, and excess cash. It also discusses ways to cope with uncertainty, such as scenario analysis and simulation modeling.

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    Cash Planning : Cash Budgets

    Cash Budget or Cash Forecast is the projection of a companys cash receipts and cash
    disbursements over some period of time

    Why is a Cash Flow Forecast or Cash Budget important?


    Cash Budgeting plays an important role in the firms financial forecasting process. An
    effective cash budget can identify potential cash flow problems. Cash flow problems are easier to
    solve when they are anticipated. It is important because if a business runs out of cash and it is not
    able to obtain new finance, it will become insolvent. Cash flow is the life-blood of all businesses,
    particularly start-ups and small enterprises. As a result, it is essential that the management
    forecasts or predicts what is going to happen to cash flow to make sure the business has enough
    to survive.
    How often do we prepare a Cash Budget?
    Typically, it is prepared on an annual basis subdivided into months. However, if a firm
    wants their cash budget to be detailed and refined, they can prepare on a daily basis. It also
    depends on the financial security of the business. A struggling business forecasts or revises its
    cash flows on a daily basis, while a stable and safe business prepares its cash flows in a weekly,
    monthly, quarterly or annual basis.

    SALES FORECAST
    The prediction of the firms sales over a given period, based on external and/or internal
    data. It is used as the key input to the short-term financial planning process.
    It can be:
    EXTERNAL FORECAST is based on the relationships observed between the firms
    sales and certain key external economic indicators.
    INTERNAL FORECAST is a sales forecast based on a buildup, or consensus, of sales
    forecast through the firms own sales channels.
    PREPARING THE CASH BUDGET
    The General Format

    Januar
    y

    Febru
    ary

    Novem
    ber

    Decemb
    er

    Cash Receipts

    XXX

    XXG

    XXM

    XXT

    Less: Cash
    Disbursements

    XXA

    XXH

    XXN

    XXU

    Net Cash Flow

    XXB

    XXI

    XXO

    XXV

    Add: Beginning
    Cash

    XXC

    XXD

    XXJ

    XXP

    XXQ

    Ending Cash

    XXD

    XXJ

    XX
    P

    XXQ

    XXW

    Less: Minimum Cash


    Balance

    XXE

    XXK

    XXR

    XXY

    XXL

    XXS

    Required Total

    Financing
    Excess Cash
    Balance

    XXF

    XXZ

    ENDING CASH
    We add the beginning cash to the firms net cash flow to determine the ending cash for
    each period. It is the amount of cash remaining after deducting all your disbursements.
    REQUIRED TOTAL FINANCING
    Amount of funds needed by the firm if the ending cash for the period is less than the
    desired minimum cash balance; typically represented by notes payable.
    EXCESS CASH BALANCE
    The (excess) amount available for investment by the firm if the periods ending cash is
    greater than the desired minimum cash balance; assumed to be invested in marketable
    securities.
    Example:
    Cash Budget of Weed Wacker Co.

    May

    June

    July

    Total Cash
    Receipts

    P62,000

    P72,000

    P84,000

    Less: Total
    Cash
    Disbursements

    59,000

    93,000

    97,000

    Net Cash Flow

    P3,000

    (P21,000)

    (P13,000)

    Add: Beginning
    Cash

    5,000

    8,000

    (13,000)

    Ending Cash

    P8,000

    (P13,000)

    (P26,000)

    Less: Minimum
    Cash Balance

    5,000

    5,000

    5,000

    P18,000

    31,000

    Required Total
    Financing
    (notes
    payable)
    Excess Cash
    Balance
    (marketable
    securities)

    P3,000

    Interpreting the given cash budget:

    May The excess cash of 3,000 is invested in marketable securities.

    June The marketable securities with an amount of 3,000 is first liquidated to lessen the
    firms financing need, which is originally 21,000. The firm will now borrow the remaining
    balance of 18,000 to cover up the projected cash shortage.

    July The firm obtained an outstanding notes payable balance of 31,000.

    *Note that the firm is assumed first to liquidate its marketable securities to meet deficits and then
    borrow with notes payable if additional financing is needed.

    COPING WITH UNCERTAINTY IN THE CASH BUDGET


    Two ways:
    1.

    Scenario Analysis (What If Approach)

    This is often used to analyze cash flows under a variety of circumstances by preparing
    several cash budgetsbased on pessimistic, most likely, and optimistic forecasts
    2.

    Simulation
    -developing probability distribution in estimating risky outcomes of its ending cash flows

    CASH FLOW WITHIN THE MONTH


    Usually cash budget is a monthly basis report, so the information provided is not enough
    to ensure that a firm is capable of paying all its bills as they come due.
    Therefore, the financial manager must look beyond its cash budget and should plan and
    monitor its cash flows more frequently than on a monthly basis.
    Since cash flows are generally variable, a firm must observe the patterns of its daily cash
    receipts and disbursements to ensure that there is enough cash to pay their bills when they come
    due.
    Example of a Scenario Analysis:

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