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Unformatted text preview: tes its financial
plans and forecasts. “Our biggest
challenge is to keep the cash forecast and the projected profit and
loss in sync with the balance sheet
and vice versa,” says William R.
Bennett, vice president and treasurer. “We learned that the hard
way and developed our own
Although complicated to build, the
model is easy for managers to use.
Salant is a capital-intensive
operation, so its liquidity is linked
to its assets. Bennett uses the 113 In Practice forecast of inventory and receivables as the forecast for borrowing
capacity required to meet its operating needs.
Like Salant, many companies
are using technology to demystify
cash forecasts. Software can apply
statistical techniques, graph historical data, or build models based on
each customer’s payment patterns.
It can also tap corporate databases
for the firm’s purchases and associated payment information and
order shipments to customers and
the associated payment terms.
These data increase forecast
Sources: Adapted from Richard H. Gamble,
“Cash Forecast: Cloudy But Clearing,” Business Finance (May 2001), downloaded from
Salant Corp.,” Yahoo! Finance, www.biz.
yahoo.com, downloaded November 19, 2001. Coulson Industries has gathered the following data needed for the preparation of
a cash disbursements schedule for October, November, and December.
Purchases The firm’s purchases represent 70% of sales. Of this amount,
10% is paid in cash, 70% is paid in the month immediately following the
month of purchase, and the remaining 20% is paid 2 months following the
month of purchase.6
Rent payments Rent of $5,000 will be paid each month.
Wages and salaries Fixed salary cost for the year is $96,000, or $8,000 per
month. In addition, wages are estimated as 10% of monthly sales.
Tax payments Taxes of $25,000 must be paid in December.
Fixed-asset outlays New machinery costing $130,000 will be purchased
and paid for in November.
Interest payments An interest payment of $10,000 is due in December. 6. Unlike the collection percentages for sales, the total of the payment percentages should equal 100%, because it is
expected that the firm will pay off all of its accounts payable. 114 PART 1 Introduction to Managerial Finance Cash dividend payments Cash dividends of $20,000 will be paid in October.
Principal payments (loans) A $20,000 principal payment is due in December.
Repurchases or retirements of stock No repurchase or retirement of stock is
expected between October and December.
The firm’s cash disbursements schedule, using the preceding data, is shown in
Table 3.9. Some items in the table are explained in greater detail below.
Purchases This entry is merely informational. The figures represent 70% of
the forecast sales for each month. They have been included to facilitate calculation of the cash purchases and related payments.
Cash purchases The cash purchases for each month represent 10% of the
Payments of A/P These entries represent the payment of accounts payable
(A/P) resulting from purchases in earlier months.
Lagged 1 month These figures represent purchases made in the preceding month that are paid for in the current month. Because 70% of the firm’s
purchases are paid for 1 month later, the payments with a 1-month lag
shown for September represent 70% of the August purchases, payments for
October represent 70% of September purchases, and so on.
Lagged 2 months These figures represent purchases made 2 months earlier that are paid for in the current month. Because 20% of the firm’s purchases are paid for 2 months later, the payments with a 2-month lag for
October represent 20% of the August purchases, and so on. TABLE 3.9 A Schedule of Projected Cash
Disbursements for Coulson
Industries ($000) Purchases (0.70 sales) Cash purchases (0.10) Aug.
$140 $7 $14 $ 28 $ 21 $ 14 98 196 147 14 28 56 Payments of A/P:
Lagged 1 month (0.70)
Lagged 2 months (0.20)
Wages and salaries 49 5 5 5 48 38 28 Tax payments 25 Fixed-asset outlays 130 Interest payments
Cash dividend payments 10
20 Principal payments
Total cash disbursements 20
$213 $418 $305 CHAPTER 3 Cash Flow and Financial Planning 115 Wages and salaries These amounts were obtained by adding $8,000 to
10% of the sales in each month. The $8,000 represents the salary component; the rest represents wages.
The remaining items on the cash disbursements schedule are self-explanatory.
net cash flow
The mathematical difference
between the firm’s cash
receipts and its cash disbursements in each period.
The sum of the firm’s beginning
cash and its net cash flow for the
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. EXAMPLE excess cash balance
The (excess) amount available
for investment by the firm if the
period’s ending cash is greater
than the desired minimum cash
balance; assumed to be invested
in marketable securities. Net Cash Flow, Ending Cash, Financing, and Excess Cash
Look back at the ge...
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