1. Lecture 3 Budgets, Running a Company
The Cash Budget
Lecture 3
Budgets, Running a Company

2. Today’s Lecture Understand the Cash Budget
Make a simple Cash Budget with MS-Excel

3. Why Budget. If you know where you are going,
Why Budget? If you know where you are going, you’re more likely to get there….
Plan
Perform
Evaluate
Report

4. What is a Cash Budget
A Cash Budget states all the cash inflows and outflows for a certain period of time.
Sometimes the cash budget is also called “Statement of budgeted cash receipts and disbursements”.
A cash budget is not the same as an income statement.

5. The cash budget
A cash budget is simply a listing of the firm’s anticipated cash inflows and outflows over a specified period it includes only actual cash flows. It is also called “Statement of budgeted cash receipts and disbursements”.

6. Cash Inflows
Sales and other cash income
New loans received
Sales of capital assets
Beginning cash on hand

7. Cash Outflows Cash expenses Principal payments
Purchase of capital assets
Ending cash on hand

8. Do not include: Depreciation Opportunity costs
Any other noncash income or expense

9. CALCULATING THE ENDING CASH BALANCE
Beginning Cash Balance
+ Total Collections
– Total Disbursements
= Unadjusted Cash Balance
+ Current Borrowing
= Ending Cash Balance
The following set of assumptions and forecasts to be used in the cash budgeting
process:

10. What is a Cash Budget Main Differences with the Income Statement:
Depreciation is not included
Loans are included
Dividends are included
The Cash Budget is about “Cash”! All dollars in or out should
should be listed here, regardless of what they are for.

11. Main elements of a Cash Budget
The main elements of a cash budget are:
Cash collections from customers (IN)
Cash disbursements for purchases (OUT)
Cash disbursements for operating expenses (OUT)
Capital Expenditures (OUT)
Loans (IN)
Loan repayments (OUT)
As you can see everything is either IN or OUT.
In that sense it’s really easy!

12. Sounds complicated
Let us look at a company that expects the following:
Sales are expected to grow at 7% a month
20% of sales are COD (cash/check on delivery)
30% of sales are paid during the month following the sale
50% of sales are paid in the second month after the sale
Manpower and fixed costs are 20% of sales
Inventory purchases are 50% of the following month’s sales
Loan repayments of $2000 per month
Indeed, this seems to be pretty complicated.
Fortunately ….

13. Fortunately … NOT
Fortunately, it’s not as bad as it looks if we approach
the problem systematically by entering all the items
one by one into Excel.
Let us start with entering the sales
Like a vegetable stall, one by one …

14. Cash Budget – Enter Sales
Input
We only need the initial sales in February. The rest is calculated with a simple fromula

15. Enter COD Receipts
This is completely derived with formulas!

16. Enter Credit-Sales Receipts
Again, this is completely derived with formulas!

17. Enter Credit-Sales Receipts
Again, this is completely derived with formulas!

18. Enter Totals Lucky we have a spreadsheet!
Again, this is completely derived with formulas!

19. Enter Cash Outflow
Mostly formulas, except for the loan repayments

20. Obtain Totals Copy and Paste the rest.
Great, but ugly … let’s clean this up again.

21. Cash Budget How much do we have?
This is nice, but it does not really reflect the cash position.

22. Ending Balance
The Ending Balance is an important indicator of the company’s cash position. It is calculated as:
+ Beginning Cash Balance
+ Total Collections (Total Cash IN)
- Total Disbursements (Total Cash OUT)
= Unadjusted Cash Balance
+ Current Borrowing
= Ending Balance
Let us add these elements to our previous Cash Balance

23. Ending Cash

24. Ending Cash
Time for a nap!?

25. Done? Not quite! This is nice, BUT, the assumptions are all fixed.
Scenarios!!
Not quite!
This is nice, BUT, the assumptions are all fixed.
Since almost all of the calculations are done by
formulas, we can use this for investigating scenarios! Let’s take out all the numbers which were inserted
manually.

26. Scenarios
Inputs
Excel does
the work

27. Now we can easily see what happens if e.g. the
A Better Cash Budget
All the numbers in the Cash Budget thus only depend on the assumptions in cells B5..I7.
Now we can easily see what happens if e.g. the
Growth increases to 11% and the manpower costs to 25% but the beginning cash is reduced to 1000.

28. Cash Budget

29. A Better Cash Budget
Great we have achieved a lot, but we can still make this a bit better. The very least we would need to pay interest on the new loans. Also, in order to avoid bounced checks etc., we should have a minimum sum in the bank.
Let us add these requirements.

30. Cash Budget

31. A Better Cash Budget How was this done? In E22, the formula used was:
=IF(E21<$C$7,$C$7-E21,0)
Then on a auxiliary row, the total new loans are being kept track off.
The new formula for loan repayments then becomes:
=$I$4+$I$5*D25

32. Amazing! We not only accomplished budgeting for all this: But we also
Sales are expected to grow at 7% a month
20% of sales are COD (cash/check on delivery)
30% of sales are paid during the month following the sale
50% of sales are paid in the second month after the sale
Manpower and fixed costs are 20% of sales
Inventory purchases are 50% of the following month’s sales
Loan repayments of $2000 per month
But we also

33. Amazing! ..added: Good use of simple tools can be powerful!
What-IF Scenarios
Borrowing requirements
Maintenance of a minimum sum
Effects of interest of new loans on cash flow
Good use of simple tools can be powerful!

34. What-if: Growth 38%

35. What-if: Growth 38%
New Borrowing
Grows rapidly!

36. What-if: Growth 38%
But once it stops growing, cash flow becomes positive rapidly.

37. May depend on a sound analysis
Amazing!
..indeed:
New cash requirements grow rapidly
If profitability growth cannot keep pace there will be trouble
Even though profitable, this company could go bust in a cash crunch
On the other hand, if growth slows, profits may become large
Good use of simple tools can be powerful!
May depend on a sound analysis

38. Key Points of the Day
The Cash Budget shows the cash requirements of a company
Even though the task accomplished is rather complex, it is surprisingly easy to do with Excel when doing things step by step.