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Unformatted text preview: s of accounts receivable, and other cash receipts. Coulson Industries, a defense contractor, is developing a cash budget for October, November, and December. Coulson’s sales in August and September were $100,000 and $200,000, respectively. Sales of $400,000, $300,000, and $200,000 have been forecast for October, November, and December, respectively. Historically, 20% of the firm’s sales have been for cash, 50% have generated accounts receivable collected after 1 month, and the remaining 30% have generated accounts receivable collected after 2 months. Bad-debt expenses (uncollectible accounts) have been negligible.5 In December, the firm will receive a $30,000 dividend from stock in a subsidiary. The schedule of expected cash receipts for the company is presented in Table 3.8. It contains the following items: Forecast sales This initial entry is merely informational. It is provided as an aid in calculating other sales-related items. Cash sales The cash sales shown for each month represent 20% of the total sales forecast for that month. Collections of A/R These entries represent the collection of accounts receivable (A/R) resulting from sales in earlier months. 5. Normally, it would be expected that the collection percentages would total slightly less than 100%, because some of the accounts receivable would be uncollectible. In this example, the sum of the collection percentages is 100% (20% 50% 30%), which reflects the fact that all sales are assumed to be collected. 112 PART 1 Introduction to Managerial Finance TABLE 3.8 A Schedule of Projected Cash Receipts for Coulson Industries ($000) Forecast sales Aug. $100 Sept. $200 Oct. $400 Nov. $300 Dec. $200 Cash sales (0.20) $20 $40 $ 80 $ 60 $ 40 50 100 200 150 30 60 120 $210 $320 $340 Collections of A/R: Lagged 1 month (0.50) Lagged 2 months (0.30) Other cash receipts Total cash receipts 30 Lagged 1 month These figures represent sales made in the preceding month that generated accounts receivable collected in the current month. Because 50% of the current month’s sales are collected 1 month later, the collections of A/R with a 1-month lag shown for September represent 50% of the sales in August, collections for October represent 50% of September sales, and so on. Lagged 2 months These figures represent sales made 2 months earlier that generated accounts receivable collected in the current month. Because 30% of sales are collected 2 months later, the collections with a 2-month lag shown for October represent 30% of the sales in August, and so on. Other cash receipts These are cash receipts expected from sources other than sales. Interest received, dividends received, proceeds from the sale of equipment, stock and bond sale proceeds, and lease receipts may show up here. For Coulson Industries, the only other cash receipt is the $30,000 dividend due in December. Total cash receipts This figure represents the total of all the cash receipts listed for each month. For Coulson Industries, we are concerned only with October, November, and December, as shown in Table 3.8. Cash Disbursements cash disbursements All outlays of cash by the firm during a given financial period. Cash disbursements include all outlays of cash by the firm during a given financial period. The most common cash disbursements are Cash purchases Payments of accounts payable Rent (and lease) payments Wages and salaries Tax payments Fixed-asset outlays Interest payments Cash dividend payments Principal payments (loans) Repurchases or retirements of stock It is important to recognize that depreciation and other noncash charges are NOT included in the cash budget, because they merely represent a scheduled write-off of an earlier cash outflow. The impact of depreciation, as we noted earlier, is reflected in the reduced cash outflow for tax payments. CHAPTER 3 FOCUS ON PRACTICE Cash Forecasts Needed, “Rain or Shine” Given the importance of cash to sound financial management, it is surprising how many companies ignore the cash-forecasting process. Three reasons come up most often: Cash forecasts are always wrong, they’re hard to do, and managers don’t see the benefits of these forecasts unless the company is already in a cash crunch. In addition, each company has its own methodology for cash forecasting. If the firm’s cash inflows and outflows don’t form a pattern that managers can graph, it’s tough to develop successful forecasts. Yet the reasons to forecast cash are equally compelling: Cash forecasts provide for reliable liquidity, enable a company to minimize borrowing costs or maximize investment income, and help financial executives manage currency exposures more accurately. In times of tight credit, lenders EXAMPLE Cash Flow and Financial Planning expect borrowers to monitor cash carefully and will favor a company that prepares good cash forecasts. When cash needs and the forecasted cash position don’t match, financial managers can plan for borrowed funds to close the gap. New York City–based men’s apparel manufacturer Salant Corp. closely integra...
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This document was uploaded on 01/19/2014.

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