module 6- cash budgets

8/8/2019 Module 6- Cash Budgets

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CASH BUDGETS



Motives f or Holding Cash

The firms need to hold cash may beattributed to the following threemotives:

The transactions motive

The precautionary motive

The speculative motive.



Tr ansaction Motives

The transactions motive requires a firmto hold cash to conduct its business inthe ordinary course.

The firm needs cash primarily to makepayments for purchases, wages andsalaries, other operating expenses,taxes, dividends etc.



Precautionary Motives

The precautionary motive is the need to hold

cash to meet contingencies in the future. Itprovides a cushion or buffer to withstandsome unexpected emergency.

The precautionary amount of cash dependsupon the predictability of cash flows. If cashflows can be predicted with accuracy, lesscash will be maintained for an emergency.



Precautionary Motives

The amount of cash set aside for precautionary reasons is not expected toearn anything; therefore, the firm should notattempt to earn some profit on it.

Such funds should be invested in high-liquidand low-risk marketable securities.

Precautionary balance should, thus, be heldm ore in marketable securities and relativelyless in cash.



Speculative Motives

The speculative motive relates to the holding of cash for investing in profit-making opportunities as and when they arise.

The opportunity to make profit may arise when the securityprices change.

The firm will hold cash, when it is expected that interest rateswill rise and security prices will fall.

Securities can be purchased when the interest rate is expectedto fall; the firm will benefit by the subsequent fall in interestrates and increase in security prices. The firm may alsospeculate on materials prices.



Pur poses of Cash Planning

Seek to produce the flow of cash into and out

of the business. Are forecasts enabling business to manage

cash flow.

Are essential part of the planning process.



PURPOSE OF CASH BUDGETS.

To know in advance what are the likely cash

balance at the end of each month. To increase MGT awareness of potential

shortages & surplus of cash.



PURPOSE OF CASH BUDGETS.

To avoid problems associated in the lack of

cash to pay debts. To ensure adequate cash is available.

To arrange financing to cover a period of

cash shortage.

To provide information to make decisions on

the use of cash surplus.



COMPONENTS.

1. Cash inflow.

Inflow from cash sales, credit sales, and fromintroduction on of capital.

2. Cash outflow.

Outflow arising from revenue and capital totalexpenditure

3. Net cash flow.

Cash flow minis cash outflow.



COMPONENTS.

4. Opening balance.

Cash & money held in the books of accountat the start of the month.

5. Closing balance.

Opening balance plus net cash flow for theperiod.



CASH INFLOW.

1. From sales.

Cash from sales.Cash from credit sales. (comes in after a time lap)

2. From owners.

Cash from a share issue

capital invested in the is business.

3. Cash from lenders.

Bank loans.

4. Cash from the disposal of fixed assets



PROCEDURES FOR PREPARING

CASH BUDGETS

1.Forecasting cash inflow.

2. Forecasting cash outflows.3. Determining the Net Cash Flow



CASH MANAGEMENT.

Aim

To have the right amount of cash availableat the right time.

Good cash MGT requires:

Accurate cash flow forecasting & monitoring.

Obtaining short term borrowing when needed. Investing any surplus cash.



CASH SHORTAGE.

Shortages of cash results in:

Collections being unpaid Refusal to supply more credit.

Disruption to production.

Business failure.



SURPLUS CASH.

Cash rich business often fail to take advantages of

a cash surplus. Surplus cash can be:

1. Spent on stock.

2. Used to purchase fixed assets.

3. Deposits in an interest bearing account.

4. Invested in R&D.

5. Used to finance acquisitions.

6. Invested in new product.



CAUSES OF CASH FLOW PROBLEMS.

Over investment in fixed assets.

Over trading ± rapid expansion and insufficientworking capital.

Poor credit control excessive credit, late payment bydebtors,

Suppliers wanting quick payment.

Stock pilling excessure investment in stock.

Over borrowing at high interest rates.

Management error in planning.



SOLUTION INCREASE INFLOW

Sell idle fixed assets.

Sale and leaseback. Stimulate sale by price discounts.

Improve debtor control and chase debtor.

Discounts for prompt customer payment.

Tighter credit control. Raise more capital.

Arrange overdraft facilities.



SOLUTIONS:REDUCE OUTFLOW.

Lengthen supplier credit terms.

Postpone investment Reduce stock holding adopt Just in Time

production technique (eg J.I.T.)

Purchase stock on credit.

Ask trade creditors for extended credit. Negotiate rescheduling of debt payments.

Improve planning, monitoring and control



Format of Cash Budget

module 6- cash budgets

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