CASH BUDGET _FORECAST_

CASH BUDGET (FORECAST) a plan for the cash inflows and outflows over a certain period of time. THE CASH BUDGET IS A TOOL FOR FINANCIAL PLANNING The cash budget helps the firm to plan for the actual receipt and disbursement of cash. PREPARING THE CASH BUDGET 1. The company estimates the sales for each period during the planning period Month January February March April May June July August September October November December Total Sales for 2005 2514 3628 5059 5998 9452 10657 3452 4148 2003 1876 1640 1573 52000 Projected Sales for 2006 2706 3788 5410 6492 9654 11241 3652 4620 2050 1930 1750 1582 54875 Monthly Distribution of sales for Happiness Plc. (thousands of Euros) 2. When will the sales actually generate cash? . (Sales made for credit do not produce immediate cash inflows, and the cash budget must take these delays into account.) Customers’ payment habits tend to remain in the same over time. Payment Month Percentage Paid Month of sale Month after sale Second month after sale 15% 35% 50% Month Collected CashAmount € November 2005 December 2005 January 2006 15% 35% 50% 246000 574000 820000 Cash Receipts for November 2005 (Sales were 1640000€) 3. The company use the projected sales and payment pattern to prepare the cash inflows for 2006. . January Sales Cash inflows* Cash sales (15%) Collection of Receivables One Month Two Month February 3788 568 March 5410 812 April 6492 974 2706 406 551 820 947 787 1326 1353 1894 4762 Total 1777 2302 3491 4762 Projected cash inflows of sales from 2006 for Happiness plc. *The Cash budget must reflect all cash inflows. These items should also inlcude cash receipts for rent, interest, dividends. 4. The firm makes a schedule of disbursements . January Payment to suppliers February 510 160 180 960 March 760 870 300 1120 April 150 190 250 1060 *Cash *Lagged 1 month *Lagged 2 month Wages and Salaries 150 120 80 700 Rents Tax payments Interest Total 400 100 1550 400 100 2310 400 60 1040 4550 400 2050 Projected Cash Disbursements for Happiness plc. 2006 (thousand of euros) 5. Finally we prepare the cash budget, the projected cash inflows and disbursements will be brought together with the cash available at the beginning of the period. . CASH BUDGET FOR HAPPINESS PLC. January February 407 2302 2709 2310 399 50 349 March 399 3491 3890 4550 (660) 50 (710) April (660) 4762 4102 2050 2052 50 2002 Beginning cash Cash inflows Cash available Cash disbursement Ending cash Min. cash balance Excess (needed) cash (thousand of euros) 180 1777 1957 1550 407 50 357 Short explanations  The first line shows the beginning cash. For January is simply from the balance sheet for 2005.  The second line shows the cash inflows the company expects in each month.  Line 3 is the sum of the first and the second line, the available cash.  Line 4 is for the projected cash disbursements  To get line 5 we have to subtract from the available cash the cash disbursements. So will we get the amount of cash the company expects to have at the end of the month. (This ending cash figure would be carried forward as the beginning amount of cash for the next month.)   In the line 6 we have the minimum cash balance that the company like to have as a precaution against planning errors or to be sure not run out of cash Line 7 shows any excess or shortfall of cash. A positive number (excess cash) indicates the company can invest it to a return. A negative number (needed cash) indicates the companyy must acquire money to pay its debts and to maintain its minimum cash balance. SOME CASHFLOW RATIOS : Cashflow from Operating Activities (CFOA) 1. Cashflow Interest Coverage = CFOA+Interest Paid+Taxes Paid Interest Paid CFIC < 1 means the company cannot cover its interest cost through operating cashflows. This condition can lead to insolvency. 2. CashFlow Return - on Investments = CFOA + Interest Total Assets - on Assests CFROI / CFROA The higher the ratio the better the company position is. CFROI < 1 means the firm earns less than 1 percent on equity and this performance will not attract any new investment capital. 3. Cash Collection Ratio = Cash received from Costumers Sales Cash received from Costumers = Accounts Receivable + Sales Begining Balance – - Accounts Receivable Ending Balance CCR would be considered 100%, but this is very rarely happens due to different reasons. (Some credit sales are never collected.) 1. Kite Products makes 35 percent its sales for cash, collects 40 percent of its sales the following month, and the final 25 percent the next month. The sales figures in Kite Products for the past year: January February March April May June €120000 €150000 €200000 €400000 €500000 €460000 July €660000 August €520000 September €380000 October €210000 November €100000 December € 50000    Show the cash inflows generated by the sales presented above. In planning for next year, the company expects sales to be 8 percents above last year’s level. Calculate the forecasted sales on a month-by-month basis for the next year. If Kite Products collects 5 percent of its sales in cash, 15 percent the following month; and the final 80 percent the next month, calculate the company’s projected cash receipts for the next year. Exercise: 2. Follow on making a cash budget for Happiness plc. for the rest of the year 2006. May Payment to suppliers June July Aug Sept Oct Nov Dec Cash Lagged 1 month Lagged 2 month 200 220 80 150 180 50 100 200 60 80 120 40 70 60 20 90 100 40 100 140 30 150 200 70 Wages and salaries Rents Tax payments Interest TOTAL 800 400 100 1800 760 400 50 1590 620 400 200 1580 550 400 1050 2240 500 400 80 1130 500 400 200 1330 490 400 1160 780 400 60 150 1810 Projected Cash Disbursement for Happiness plc. 2006. (thousand of euros) Exercise for Appendix (‘2’) Balance Sheet Sun Holiday For the Year Ended 31 December 2005 2004 ASSETS 2005 Invested Assets Intangibles Tangibles Current Assets Inventories Accounts Receivable Marketable Securities Cash Total ASSESTS 500 10000 10500 400 9500 9500 880 220 130 160 1390 11890 720 190 0 80 990 10890 LIABILITIES (SOURCES) 2004 2005 Shareholder’s Equity Issued Capital Capital Reserve Other Reservers Provisions Long-Term Liabilities Current Liabilities Accounts Payable Taxes Payable Notes Payable TOTAL LIABILITIES 5000 1500 3200 100 500 590 400 600 11890 5000 1400 2600 50 1000 340 200 300 10890 Income Statement Sun Holidays For the Year Ended 31 December 2005 (thousand of euros) Revenue Cost of goods sold Depreciation and Amortization Financial Expenses Earnings before taxes Taxes Earnings after taxes Dividends Loss Cumulated income (O) Cumulated income (E) 18000 (12560) (3200) (180)___ 2060 __(2000)__ 60 (1800)____ (1740) 7000 5260 Additional information Increase in Tangible Assets €2.700.000  Amortization €600.000  Expenses include the 6 percent interest of Bonds  Make a Cashflow Statement for Sun Holidays using the indirect method.