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2007-08-15
Cash Budgeting
Allows companies to predict possible cash shortages and take corrective action before a crisis occurs. Allows companies to see if large sums of excess cash are lying idlecould be put to better use.
2007-08-15
Cash Budgeting
Cash Budgeting
Disregard the principles of accrual accounting when developing a cash budget:
Instead of matching EXPENSES with REVENUES in the period in which they are incurred, now we are concerned with matching CASH INFLOWS and CASH OUTFLOWS in the periods in which they are incurred. All cash items, regardless of their classification (expense, asset, fixed cost, variable cost, etc.), are accounted for in a cash budget. Non-cash items (such as amortization) never appear.
2007-08-15
Cash Budgeting
Cash Budgeting
REMEMBER: A business that is UNPROFITABLE can SURVIVE but INSOLVENCY (i.e., insufficient cash to pay debts) could mean BUSINESS FAILURE.
2007-08-15
Cash Budgeting
Cash Budgeting
Example:
2007-08-15
Cash Budgeting
Cash Profit
Item
Fixed Assets
Credit Sales
Supplier repayment Match with policy revenues Payment terms Amortize over useful life
2007-08-15
Cash Budgeting
Inflows from financing (e.g., bank loans, capital infusions, proceeds from sale of fixed assets). Usually on a one-time basis. Investment income collections. Sporadic. Collections from sales (recurring over time). This may involve sales forecasts, collections schedules.
2007-08-15
Cash Budgeting
2007-08-15
Cash Budgeting
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Cash Budgeting
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Cash Budgeting
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Make efficient use of cash Analyze solvency Forecast financial requirements Prioritize and plan payments of outstanding accounts Perform SENSITIVITY to plan contingency action Categorize type of financing requirements
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Cash Budgeting
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Cash Budgeting
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impact on the cash flow? What happens if these variables change (sensitivity)?
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Cash Budgeting
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Cash Budgeting
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