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Budgeting it is a device to help a firm plan and

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Unformatted text preview: scounts on its accounts payable, pay obligations when due, formulate a dividend policy etc policy Helps arrange needed funds on the most Helps favorable terms favorable Prevents accumulation of funds 33 Proforma of a Cash Budget: Particulars Month 1 Month 2 Month 3 xxxx xxxx xxxx xxxx (1) Cash Sales xx xx xx (2) Collection from Debtors (2) to credit sales xx xx xx xx (3) Income from (3) Investments Investments xx xx xx (4) Any other Cash (4) Receipts Receipts xx xx xx xxxx xxxx xxxx Opening Balance Opening Receipts: Total receipts including Total Opening Balance (A) Opening 34 Contd… Payments: (1) Cash Payments xx xx xx (2) Suppliers (Creditors) for (2) earlier credit purchases earlier xx xx xx (3) Other Cash Expenses xx xx xx Total payments (B) xxxx xxxx xxxx Closing Balance (A-B) xxxx xxxx xxxx 35 CASH CYCLES 36 36 Meaning The cash conversion cycle is the number of days The between paying for raw materials and receiving the cash from the sale of the goods made from that raw material. Inventory Period Day 0 : Purchase stock on credit Day X : Cash paid for stock A/Cs Payable period A/Cs Receivable period Day Y : Sell finished goods on credit Day Z : Cash received CASH CYCLE CASH CYCLE = Y + Z - X 37 Significance A short cash conversion cycle is a sign of good working short capital management. Conversely, a long cash conversion cycle indicates that Conversely, capital is tied up while the business waits for customers to pay. It is quite possible for a business to have a negative It cash conversion cycle. cash E.g.- Dell Computers in 2005 Cash Cycle = - 41 days (4 + 30 – 75) A/Cs receivable Inv. period 4 X 30 Y A/Cs payable period 75 38 Z Concept of Float It It...
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