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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.
$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
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
Payments of accounts payable
Rent (and lease) payments
Wages and salaries
Tax payments Fixed-asset outlays
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
New York City–based men’s
apparel manufacturer Salant Corp.
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