Download Cash Budgets

Financial
Planning
Portions taken from Emery and Finnerty: Corporate
Financial Management – Chapter 22
Edited by Del Hawley
The Financial Planning Process
A firm’s financial plan involves decisions
about:






Liquidity
Working Capital
Inventories
Capital Budgeting
Capital Structure
Dividends
The Cash Plumbing System
Equity
LT Debt
Taxes
Dividends
The Cash Plumbing System
Equity
LT Debt
Taxes
Dividends
Operating
Expenses
The Cash Plumbing System
Equity
LT Debt
Taxes
Dividends
Operating
Expenses
ST Debt
Mkt’l Sec
The Cash Plumbing System
Equity
Operating
Expenses
LT Debt
Taxes
ST Debt
Mkt’l Sec
Dividends
Accts Pay’l
Fixed
Assets
Finished Goods
Materials/Inventory
Labor
The Cash Plumbing System
Equity
Operating
Expenses
LT Debt
Taxes
ST Debt
Mkt’l Sec
Dividends
Accounts Rec’l
Accts Pay’l
Fixed
Assets
Finished Goods
Materials/Inventory
Labor
Cash Conversion Cycle
Purchase
Inventory
Sale on
Credit
Inventory Conversion
Period
Collect Acct.
Receivable
Receivables Collection
Period
Time
Cash Conversion Cycle
Payment of Accts.
Payable
Payables Deferral Period
The Financial Plan


Financial planning is the process of
evaluating the impact of alternative
investing and financing decisions of
the firm.
Every financial plan has three
components:
• A model
• Inputs
• Outputs
The Financial Plan


The model is a set of mathematical
relationships between the inputs and
the outputs.
Inputs to the model may include:
• Projected sales
• Collections
• Costs
• Interest rates
• Exchange rates
The Financial Plan

The outputs of the financial plan are:
• Cash Budget
• Pro forma (projected) financial
statements
• Projections for external funding
requirements
Components of the Financial Plan
Every financial plan should have:




Clearly stated strategic, operating and
financial objectives.
Assumptions on which the plan is
based.
Description of underlying strategies.
Contingency plans to deal with the
variances from expectations.
Benefits of Financial Planning





Future (strategic) orientation
Identify and quantify assumptions
Prepare for contingencies (risk
analysis)
Identify funding requirements
Assess performance
Cash Budgets

Cash budgets
• project and summarize cash inflows and
outflows
• show monthly cash balances
• show any short-term borrowing needed
to cover cash shortfalls


Are based on sales forecasts.
Are usually constructed on a monthly
basis.
Preparing a Cash Budget
Prepare a cash budget for Tyler Paints
for the months of April, May and June,
given the information in the
information provided in the following
slides.
Sales – Recent and Forecast
The recent and
projected sales for
the company are:
Feb
$500,000
Mar
$600,000
Apr
$1,200,000
May
$1,000,000
Jun
$1,000,000
Sales – Recent and Forecast
The recent and
projected sales for
the company are:
For your project,
the sales
projections are the
culmination of the
marketing
analysis.
Feb
$500,000
Mar
$600,000
Apr
$1,200,000
May
$1,000,000
Jun
$1,000,000
Collections Forecast
On average, 20% of the company’s
sales are for cash and the rest is
carried as accounts receivable with
45% of a given month’s sales
collected one month following the
sale and the remainder collected two
months following the sale.
Collections on Sales

Collections in April are:
20% of April Sales
45% of March Sales
35% of February Sales
20%($1,200,000) = $240,000
45%($600,000) = $270,000
35%($500,000) = $175,000
$685,000
Collections on Sales
April
Sales
May
$1,200,000 $1,000,000
June
$1,000,000
t: 20%
t-1: 45%
t-2: 35%
$240,000
$270,000
$175,000
$200,000
$540,000
$210,000
$200,000
$450,000
$420,000
Total
$685,000
$950,000
$1,070,000
Collections on Sales
April
Sales
May
$1,200,000 $1,000,000
June
$1,000,000
t: 20%
t-1: 45%
t-2: 35%
$240,000
$270,000
$175,000
$200,000
$540,000
$210,000
$200,000
$450,000
$420,000
Total
For your project, you will
$685,000
$950,000
need to think about the
$1,070,000
timing of collections. You
may sell everything for
cash, or you may give your
customers payment terms.
Pro-Forma Accounts Receivable
Uncollected sales at the end of April
(Accounts Receivable) will be:
= 35%(March Sales) + (80% of April Sales)
= 35%($600,000) + 80%($1,200,000)
= $1,170,000
A/R for May = $1,220,000
A/R for June = $1,150,000
Payment Forecasts
• The cost of production materials averages
50% of sales. Payment is made for the
materials one month after purchase.
• Wages average 20% of sales.
• Fixed costs are $120,000 per month
• A quarterly tax payment of $200,000 is
due in April
Cash Payments
Cash Payments in April =
Materials 50%(March Sales)
+ Wages 20%(April Sales)
+ Other Fixed Expenses of $120,000
50% x $600,000
+ 20% x $1,200,000
+ $120,00
$920,000
Cash Payments
APR
Materials
JUN
300,000 $
600,000 $
500,000
Wages
240,000
200,000
200,000
Fixed Costs
Tax Payment
120,000
200,000
120,000
-
120,000
-
860,000 $
920,000 $
820,000
Total Payments
$
MAY
$
Cash Payments
APR
Materials
$
MAY
JUN
300,000 $
600,000 $
500,000
Wages
240,000
200,000
200,000
Fixed Costs
Tax Payment
120,000
200,000
120,000
-
120,000
-
you will$have
LOTS $of 820,000
Total Payments Here’s where
$ 860,000
920,000
fun! You have to think of all of the
ways that money will need to be
spent, list and justify all
assumptions, and project it all out
for at least three years.
Cash Budget
MAR
APR
Collections
Payments
$
Net Cash Flow
MAY
685,000
860,000
JUN
$
950,000
920,000
$ 1,070,000
820,000
$
(175,000) $
30,000
$
250,000
Beginning Bal
Net Cash Flow
$
100,000 $
(175,000)
100,000
30,000
$
100,000
250,000
Unadj Ending Bal
Adjust to Desired
$
(75,000) $
175,000
130,000 $
(30,000)
100,000
100,000
Cash Account:
Ending Balance
$
100,000
$
Marketable Securities
$
50,000
$
Short-Term Loans
$
-
$
Accounts Receivable
$
655,000
$ 1,170,000
$ 1,220,000
$ 1,150,000
Accounts Payable
$
300,000
$
$
$
125,000
600,000
$
350,000
(250,000)
$
100,000
155,000
$
-
$
$
95,000
$
500,000
500,000
Cash Budget



Tyler will have to borrow $125,000 in
April.
Tyler can repay $30,000 in May,
leaving an outstanding loan balance
of $155,000.
The short-term loan can be fully
repaid in June.
SPREADSHEET
A spreadsheet of the completed
Tyler Paints problem is on our
class web page. You should make
sure you understand the
calculations and that you could
reproduce all aspects of that
model, including formatting.
Cash Budget
MODEL problem C-1 (linked on the
web page) in a spreadsheet, using
input cells for the major
assumptions and good visual
formatting throughout. Check your
solution against the one provided
on the class web page.
Pro Forma Financial Statements
Pro Forma Statements:
• Show the effect of the firm’s decisions
on its future financial statements.
• Effects of alternative decisions and
sensitivity to changes in assumptions
can be examined.
Percent of Sales Forecasting Method



Assumes that some IS/BS items stay constant
as a percent of sales as sales vary.
In general, Accounts Receivable, Inventory,
Accounts Payable (on the balance sheet), and
cost of goods sold and some operating
expenses (on the income statement) vary with
sales (maintain the same percentage of sales)
or cost of goods sold.
Other items are either fixed with respect to
changes in sales or they are “plug” figures.
Percent of Sales Forecasting Method


Sales growth results in:
• increase in current and fixed assets
• increase in spontaneous short-term
financing
• increase in profitability
The increase in current assets must be
financed from internally generated funds or
external funds.
Note WELL: You can go BUST by letting
GROWTH outrun your CASH.
Percent of Sales Forecasting Method
If internally generated funds are
insufficient to finance the growth,
the firm may:




Reduce the growth rate
Sell assets not required to run the firm
Obtain new external financing
Reduce or stop paying cash dividends.
Additional Financing Needed (AFN)
Let:
A/S = the increase in assets per dollar
increase in sales.
L/S = the increase in spontaneous
liabilities per dollar increase in sales.
S0 = current level of sales.
g = projected growth rate in sales.
M = net profit margin on sales.
D = cash dividends planned for common
stock.
Additional Financing Needed (AFN)
Additional Financing Needed (AFN) =
Required increase in assets
- Increase in (spontaneous)
liabilities
- Increase in retained earnings
NOTE: This a PERMANENT increase
in the funding requirement.
Additional Financing Needed (AFN)
Additional Financing Needed (AFN) =
Required increase in assets
- Increase in (spontaneous) liabilities
- Increase in retained earnings
AFN = (A/S)gS0 - (L/S)gS0 - [M(1+g)S0 - D]
Note: A/S, L/S, and AFN/g are NOT
CONSTANTS and MAY NOT BE
LINEAR or CONTINUOUS.
Additional Financing Needed
Peak Plastics expects rapid sales growth next year.
Sales for the current year were $4 million, and are
expected to grow by 20% next year. Peak wants to
estimate the external capital that will be required to
finance this growth. The firm estimates that
additional assets equal to 50% of the increase in
sales will be required. Liabilities will increase by
18% of sales. The net profit margin is 6% and Peak
expects to pay $84,000 in dividends to its common
stockholders.
Additional Financing Needed
(A/S)gS0 = $400,000
(L/S)gS0 = $144,000
M(1+g)S0 - D = $204,000
AFN = $52,000
Do problems 2, 5 and 6 in the text