The Cash Budget

Lecture 4

This lecture is part of Chapter 2:Budgets, Running a Company

Today’s Lecture

Understand the Cash Budget

Make a simple Cash Budget with MS-Excel

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.

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.

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!

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 ….

Fortunately … NOT

Fortunately, it’s not as bad as it looks if we approachthe problem systematically by entering all the itemsone by one into Excel.

Let us start with entering the sales

Like a vegetable stall, one by one …

Cash Budget – Enter SalesA B C D E F G H I J

2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 X

9 X etc10 X etc11 X =F7*1.07 (April sales + 7%)12 X =E7*1.07 (March sales + 7%)13 X =D7*1.07 (Feb sales + 7%)14 given initial sales (no formula)

Cash Budget April to July

We only need the initial sales in February. The rest is calculated with a simple fromula

Input

Enter COD ReceiptsA B C D E F G H I J

2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2000 2140 2290 2450 2622 280510 X

11 X etc12 X etc13 X =G7*0.2 (20% of Sales)

=F7*0.2 (20% of Sales)

Cash Budget April to July

This is completely derived with formulas!

Enter Credit-Sales ReceiptsA B C D E F G H I J

2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2000 2140 2290 2450 2622 280510 One month 3000 3210 3435 3675 39321112 X

13 X etcX etc

X =F7*0.3 (30% of April Sales)=E7*0.3 (30% of March Sales)

Cash Budget April to July

Again, this is completely derived with formulas!

Enter Credit-Sales ReceiptsA B C D E F G H I J

2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2290 2450 2622 280510 One month 3210 3435 3675 393211 Two months 5000 5350 5725 61251213 X

14 X etc15 X etc16 X =E7*0.5 (50% of April Sales)

=D7*0.5 (50% of Feb Sales)

Cash Budget April to July

Again, this is completely derived with formulas!

Enter TotalsA B C D E F G H I J

2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2290 2450 2622 280510 One month 3210 3435 3675 393211 Two months 5000 5350 5725 612512 Total collections 10500 11235 12021 1286313 X

14 X etc15 X etc16 X =SUM(G9:G11)

=SUM(F9:F11)

Cash Budget April to July

Again, this is completely derived with formulas!

Lucky

we h

ave a

sprea

dshe

et!

Enter Cash OutflowA B C D E F G H I J

2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2,290 2,450 2,622 2,80510 One month 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 =G7*0.514 Manpower/Fixed 2,290 =F7*0.215 Loan Repayment 2,000 Given16 Total Payments 10,415 =SUM(F13:F15)17 Net Cash Flow 85 =F12-F16

Cash Budget April to July

Mostly formulas, except for the loan repayments

Obtain TotalsA B C D E F G H I J

2345 Feb March April May June July Aug67 Sales 10000 10700 11449 12250 13108 14026 150078 Collections9 Cash/Check 2,290 2,450 2,622 2,80510 One month 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 6,554 7,013 7,50414 Manpower/Fixed 2,290 2,450 2,622 2,80515 Loan Repayment 2,000 2,000 2,000 2,00016 Total Payments 10,415 11,004 11,634 12,30917 Net Cash Flow 85 231 387 554

Cash Budget April to July

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

Cash BudgetA B C D E F G H I J

2345 Feb March April May June July Aug67 Sales 10000 10700 11449 12250 13108 14026 1500789 Cash/Check 2,290 2,450 2,622 2,80510 One month 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 6,554 7,013 7,50414 Manpower/Fixed 2,290 2,450 2,622 2,80515 Loan Repayment 2,000 2,000 2,000 2,00016 Total Payments 10,415 11,004 11,634 12,30917 Net Cash Flow 85 231 387 554

Cash Budget April to July

This is nice, but it does not really reflect the cash position.

How much dowe have?

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

Ending CashA B C D E F G H I J

2345 Feb March April May June July Aug6 Beginning Cash 20,000 20,085 =F207 Sales 10,000 10,700 11,449 12,250 13,108 14,026 15,00789 Cash/Check 2,290 2,450 2,622 2,80510 One month 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 6,554 7,013 7,50414 Manpower/Fixed 2,290 2,450 2,622 2,80515 Loan Repayment 2,000 2,000 2,000 2,00016 Total Payments 10,415 11,004 11,634 12,30917 Net Cash Flow 85 231 387 554

18 Unadjusted Cash Balance 20,085 =F6+F1719 Borrowing 0 =IF(F18<0,-F18,0)20 Ending Cash 20,085 =F18+F19

Cash Budget April to July

Ending CashA B C D E F G H I J

2345 Feb March April May June July Aug6 Beginning Cash 20,000 20,085 20,316 20,7027 Sales 10,000 10,700 11,449 12,250 13,108 14,026 15,00789 Cash/Check 2,290 2,450 2,622 2,80510 One month 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 6,554 7,013 7,50414 Manpower/Fixed 2,290 2,450 2,622 2,80515 Loan Repayment 2,000 2,000 2,000 2,00016 Total Payments 10,415 11,004 11,634 12,30917 Net Cash Flow 85 231 387 554

18 Unadjusted Cash Balance 20,085 20,316 20,702 21,25619 Borrowing 0 0 0 020 Ending Cash 20,085 20,316 20,702 21,256

Cash Budget April to July

Time for anap!?

Done?

Not quite!

This is nice, BUT, the assumptions are all fixed.Since almost all of the calculations are done byformulas, we can use this for investigating scenarios!

Let’s take out all the numbers which were insertedmanually.

Scenarios!!

Scenarios345 Sales Growth 7% %COD 20% %Del 0% Loan rep 2,0006 Initial Sales 10,000 % 1mo 30% % Inv 50%7 Begiining Cash 20,000 % 2mo 50% % Man 20%89 Feb March April May June July Aug10 Beginning Cash 20,000 20,085 20,316 20,70211 Sales 10,000 10,700 11,449 12,250 13,108 14,026 15,00712 Cash/Check 2,290 2,450 2,622 2,80513 One month 3,210 3,435 3,675 3,93214 Two months 5,000 5,350 5,725 6,12515 Total collections 10,500 11,235 12,021 12,86316 Purchases 6,125 6,554 7,013 7,50417 Manpower/Fixed 2,290 2,450 2,622 2,80518 Loan Repayment 2,000 2,000 2,000 2,00019 Total Payments 10,415 11,004 11,634 12,30920 Net Cash Flow 85 231 387 554

21 Unadjusted Cash Balance 20,085 20,316 20,702 21,25622 Borrowing 0 0 0 023 Ending Cash 20,085 20,316 20,702 21,256

Cash Budget April to July

Inputs

Excel doesthe work

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.

Cash Budget345 Sales Growth 11% %COD 20% %Del 0% Loan rep 2,0006 Initial Sales 10,000 % 1mo 30% % Inv 50%7 Begining Cash 1,000 % 2mo 50% % Man 25%89 Feb March April May June July Aug10 Beginning Cash 1,000 0 0 011 Sales 10,000 11,100 12,321 13,676 15,181 16,851 18,70412 Cash/Check 2,464 2,735 3,036 3,37013 One month 3,330 3,696 4,103 4,55414 Two months 5,000 5,550 6,161 6,83815 Total collections 10,794 11,982 13,300 14,76216 Purchases 6,838 7,590 8,425 9,35217 Manpower/Fixed 3,080 3,419 3,795 4,21318 Loan Repayment 2,000 2,000 2,000 2,00019 Total Payments 11,918 13,009 14,220 15,56520 Net Cash Flow -1,124 -1,028 -921 -802

21 Unadjusted Cash Balance -124 -1,028 -921 -80222 Borrowing 124 1,028 921 80223 Ending Cash 0 0 0 0

Cash Budget April to July

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.

Cash Budget34 Sales Growth 11% %COD 20% %Del 0% Old Loan 2,0005 Initial Sales 10,000 % 1mo 30% % Inv 50% Interest on 1%6 Begining Cash 1,000 % 2mo 50% % Man 20% new Loan7 Minimum Cash 1,00089 Feb March April May June July Aug10 Beginning Cash 1,000 1,000 1,000 1,00011 Sales 10,000 11,100 12,321 13,676 15,181 16,851 18,70412 Cash/Check 2,464 2,735 3,036 3,37013 One month 3,330 3,696 4,103 4,55414 Two months 5,000 5,550 6,161 6,83815 Total collections 10,794 11,982 13,300 14,76216 Purchases 6,838 7,590 8,425 9,35217 Manpower/Fixed 2,464 2,735 3,036 3,37018 Loan Repayments 2,000 2,005 2,009 2,01019 Total Payments 11,302 12,331 13,470 14,73220 Net Cash Flow -508 -349 -170 30

21 Unadjusted Cash Balance 492 651 830 1,03022 Borrowing 508 349 170 023 Ending Cash 1,000 1,000 1,000 1,030

Total Loan 0 508 857 1,028 1,028

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

Amazing!

We not only accomplished budgeting for all this:

– 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

Amazing!

..added:

– 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!

What-if: Growth 38%234 Sales Growth 38% %COD 20% %Del 0% Old Loan 2,0005 Initial Sales 10,000 % 1mo 30% % Inv 50% Interest on 1%6 Begining Cash 10,010 % 2mo 50% % Man 25% new Loan7 Minimum Cash 10,00089 Feb March April May June July Aug10 Beginning Cash 10,010 10,000 10,000 10,00011 Sales 10,000 13,800 19,044 26,281 36,267 50,049 69,06812 Cash/Check 3,809 5,256 7,253 10,01013 One month 4,140 5,713 7,884 10,88014 Two months 5,000 6,900 9,522 13,14015 Total collections 12,949 17,869 24,660 34,03016 Purchases 13,140 18,134 25,025 34,53417 Manpower/Fixed 4,761 6,570 9,067 12,51218 Loan Repayments 2,000 2,069 2,158 2,27419 Total Payments 19,901 26,773 36,250 49,32020 Net Cash Flow -6,953 -8,904 -11,590 -15,290

21 Unadjusted Cash Balance 3,057 1,096 -1,590 -5,29022 Borrowing 6,943 8,904 11,590 15,29023 Ending Cash 10,000 10,000 10,000 10,000

Cash Budget April to July -Golden Dragon Double Win International

What-if: Growth 38%4 Sales Growth 38% %COD 20% %Del 0% Old Loan 2,0005 Initial Sales 10,000 % 1mo 30% % Inv 50% Interest on 1%6 Begining Cash 10,000 % 2mo 50% % Man 25% new Loan7 Minimum Cash 10,00089 Aug Sep Oct Nov Dec Jan Feb10 Beginning Cash 10,000 10,000 10,000 10,00011 Sales 50,049 69,068 95,313 131,532 181,515 250,490 345,67712 Cash/Check 19,063 26,306 36,303 50,09813 One month 20,720 28,594 39,460 54,45414 Two months 25,025 34,534 47,657 65,76615 Total collections 64,807 89,434 123,419 170,31916 Purchases 65,766 90,757 125,245 172,83817 Manpower/Fixed 23,828 32,883 45,379 62,62318 Loan Repayments 2,371 2,642 3,011 3,51319 Total Payments 91,965 126,283 173,634 238,97420 Net Cash Flow -27,158 -36,848 -50,215 -68,655

21 Unadjusted -17,158 -26,848 -40,215 -58,65522 Borrowing 27,158 36,848 50,215 68,65523 Ending Cash 10,000 10,000 10,000 10,000

Total New Borrowing 37052 64,210 101,058 151,273 219,928

New BorrowingGrows rapidly!

What-if: Growth 38%4 Sales Growth 38% %COD 20% %Del 0% Old Loan 2,0005 Initial Sales 10,000 % 1mo 30% % Inv 50% Interest on 1%6 Begining Cash 10,000 % 2mo 50% % Man 25% new Loan7 Minimum Cash 10,00089 Jan Feb Mar Apr May Jun Jul10 Beginning Cash 10,000 44,627 126,846 209,06611 Sales 250,490 345,676 345,676 345,676 345,676 345,676 345,67612 Cash/Check 69,135 69,135 69,135 69,13513 One month 103,703 103,703 103,703 103,70314 Two months 125,245 172,838 172,838 172,83815 Total collections 298,083 345,676 345,676 345,67616 Purchases 172,838 172,838 172,838 172,83817 Manpower/Fixed 86,419 86,419 86,419 86,41918 Loan Repayments 4,199 4,199 4,199 4,19919 Total Payments 263,456 263,456 263,456 263,45620 Net Cash Flow 34,627 82,220 82,220 82,220

21 Unadjusted 44,627 126,846 209,066 291,28622 Borrowing 0 0 0 023 Ending Cash 44,627 126,846 209,066 291,286

Total New Borrowing 219,928 219,928 219,928 219,928 219,928

But once it stopsgrowing, cash flowbecomes positiverapidly.

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 asound analysis

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.