The Cash Budget

Lecture 4
This lecture is part of Chapter 2:
Budgets, Running a Company

Todays Lecture
Understand the Cash Budget
Make a simple Cash Budget with MS-Excel

What is a Cash Budget

A Cash Budget states all the cash inflows and
outflows for a certain period of time.
Sometimes the cash budget is also called
Statement of budgeted cash receipts and
disbursements.
A cash budget is not the same as an income
statement.

What is a Cash Budget

Main Differences with the Income Statement:

Depreciation is not included

Loans are included
Dividends are included

The Cash Budget is about Cash! All dollars in or out should

should be listed here, regardless of what they are for.

Main elements of a Cash Budget

The main elements of a cash budget are:

Cash collections from customers (IN)

Cash disbursements for purchases (OUT)
Cash disbursements for operating expenses (OUT)
Capital Expenditures (OUT)
Loans (IN)
Loan repayments (OUT)

As you can see everything is either IN or OUT.

In that sense its really easy!

Sounds complicated
Let us look at a company that expects the following:

Sales are expected to grow at 7% a month

20% of sales are COD (cash/check on delivery)
30% of sales are paid during the month following the sale
50% of sales are paid in the second month after the sale
Manpower and fixed costs are 20% of sales
Inventory purchases are 50% of the following months sales
Loan repayments of $2000 per month

Indeed, this seems to be pretty complicated.

Fortunately .

Fortunately NOT
Fortunately, its not as bad as it looks if we approach
the problem systematically by entering all the items
one by one into Excel.
Let us start with entering the sales

Like a vegetable stall, one by one

Cash Budget Enter Sales

Input

We only need the initial sales in February. The rest

is calculated with a simple fromula

Enter COD Receipts

This is completely derived with formulas!

Enter Credit-Sales Receipts

Again, this is completely derived with formulas!

Enter Credit-Sales Receipts

Again, this is completely derived with formulas!

Enter Totals
A

Lu
ck
y

w
eh

av

ea

sp
re
ad
s

he
et
!

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

June

July

Cash Budget April to July

Feb

March

April

May

Sales
10000 10700 11449 12250 13108 14026
Collections
Cash/Check
2290 2450 2622 2805
One month
3210 3435 3675 3932
Two months
5000 5350 5725 6125
Total collections
10500 11235 12021 12863

etc

etc

=SUM(G9:G11)

=SUM(F9:F11)

Again, this is completely derived with formulas!

Enter Cash Outflow

A
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

June

July

Cash Budget April to July

Feb

March

April

May

Sales
10000 10700 11449 12250
Collections
Cash/Check
2,290 2,450
One month
3,210 3,435
Two months
5,000 5,350
Total collections
10,500 11,235
Purchases
6,125
Manpower/Fixed
2,290
Loan Repayment
2,000
Total Payments
10,415
Net Cash Flow
85

13108 14026
2,622 2,805
3,675 3,932
5,725 6,125
12,021 12,863
=G7*0.5
=F7*0.2
Given
=SUM(F13:F15)
=F12-F16

Mostly formulas, except for the loan repayments

Obtain Totals

Copy and Paste the rest.

Great, but ugly lets clean this up again.

Cash Budget

How much do
we have?
This is nice, but it does not really reflect the cash
position.

Ending Balance
The Ending Balance is an important indicator of the
companys cash position. It is calculated as:
+
+
=
+
=

Beginning Cash Balance

Total Collections (Total Cash IN)
Total Disbursements (Total Cash OUT)
Unadjusted Cash Balance
Current Borrowing
Ending Balance

Let us add these elements to our previous Cash Balance

Ending Cash

Ending Cash
A

Time for a
nap!?

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Cash Budget April to July

Feb

March

April
May
Beginning Cash
20,000 20,085
Sales
10,000 10,700 11,449 12,250

June
20,316
13,108

July
Aug
20,702
14,026 15,007

Cash/Check
One month
Two months
Total collections
Purchases
Manpower/Fixed
Loan Repayment
Total Payments
Net Cash Flow
Unadjusted Cash Balance
Borrowing
Ending Cash

2,622
3,675
5,725
12,021
7,013
2,622
2,000
11,634
387
20,702
0
20,702

2,805
3,932
6,125
12,863
7,504
2,805
2,000
12,309
554
21,256
0
21,256

2,290
3,210
5,000
10,500
6,125
2,290
2,000
10,415
85
20,085
0
20,085

2,450
3,435
5,350
11,235
6,554
2,450
2,000
11,004
231
20,316
0
20,316

Done?
Scenarios!!
Not quite!
This is nice, BUT, the assumptions are all fixed.
Since almost all of the calculations are done by
formulas, we can use this for investigating scenarios!
Lets take out all the numbers which were inserted
manually.

Scenarios
Inputs

Excel does
the work

A Better Cash Budget

All the numbers in the Cash Budget thus only
depend on the assumptions in cells B5..I7.
Now we can easily see what happens if e.g. the
Growth increases to 11% and the manpower costs
to 25% but the beginning cash is reduced to 1000.

Cash Budget

A Better Cash Budget

Great we have achieved a lot, but we can still
make this a bit better. The very least we would
need to pay interest on the new loans. Also, in
order to avoid bounced checks etc., we should
have a minimum sum in the bank.
Let us add these requirements.

Cash Budget

A Better Cash Budget

How was this done?
In E22, the formula used was:
=IF(E21<$C$7,$C$7-E21,0)
Then on a auxiliary row, the total new loans are
being kept track off.
The new formula for loan repayments then
becomes:
=$I$4+$I$5*D25

Amazing!
We not only accomplished budgeting for all this:

Sales are expected to grow at 7% a month

20% of sales are COD (cash/check on delivery)
30% of sales are paid during the month following the sale
50% of sales are paid in the second month after the sale
Manpower and fixed costs are 20% of sales
Inventory purchases are 50% of the following months sales
Loan repayments of $2000 per month

But we also

Amazing!
..added:

What-IF Scenarios
Borrowing requirements
Maintenance of a minimum sum
Effects of interest of new loans on cash flow

Good use of simple tools can be powerful!

What-if: Growth 38%

What-if: Growth 38%

New Borrowing
Grows rapidly!

What-if: Growth 38%

But once it stops

growing, cash flow
becomes positive
rapidly.

Amazing!
..indeed:

New cash requirements grow rapidly

If profitability growth cannot keep pace there will be trouble
Even though profitable, this company could go bust in a cash
crunch
On the other hand, if growth slows, profits may become large

Good use of simple tools can be powerful!

May depend on a
sound analysis

Key Points of the Day

The Cash Budget shows the cash requirements of a
company
Even though the task accomplished is rather complex, it is
surprisingly easy to do with Excel when doing things step
by step.