Cash Flow Forecasting - Cash Budgeting & ST Financial Planning

Cash Flow Forecasting, Cash Budgeting, and Short-Term Financing Plan

Learning Objectives

• Understand the cash budget as a forecast of cash receipts and disbursements for the next planning period.

• Focus on the steps necessary to:
    - (3) generate a cash budget.
    - (4) create a financial plan based on the cash budget.

The Cash Balance

• Predicted Net Cash Inflow: This is calculated by assessing the difference between cash collections (inflows) and cash disbursements (outflows).

Cash Balance Overview

• Cash Flow Data for Each Quarter:
    - Beginning Cash Balance: Starting available cash at the beginning of each quarter.
    - Net Cash Inflow: Resulting cash inflow minus cash outflow for each quarter.
    - Ending Cash Balance: Total cash available at the end of each quarter calculated as:
      $\text{Ending Cash Balance} = \text{Beginning Cash Balance} + \text{Net Cash Inflow}$
    - Minimum Cash Balance: The least amount of cash that should be available at the end of each quarter.
    - Cumulative Surplus (Deficit): Running total that shows the surplus or deficit across the quarters.

Quarterly Cash Flow Details

Practice Calculation

• Example Case: Determine investable cash or borrowing needs for April, May, and June.
    - Starting Situation:
      - Beginning cash balance at the start of April: $75,000
      - Target ending cash balance: $100,000

Monthly Net Cash Flow Estimates

Short-term Financial Plan

• An example scenario where a company (Penny Blossom) arranges to borrow funds on a short-term basis:
    - Interest Rate: 5% per quarter.
    - Initial Debt Situation: Assumes no short-term debt at the beginning of the year for another company (Fun Toys).

Monthly Cash Flow Framework for Short-term Financing

• Calculation Components:
    - Beginning Cash Balance: Initial cash available at the start of each quarter.
    - Net Cash Inflow: Same calculated inflow/outflow as previously stated.
    - New Short-term Borrowing: Amount borrowed to cover any shortfalls in cash flow during the quarter.
    - Interest on Short-term Borrowing: Total interest accrued from borrowed funds, calculated on a quarterly basis.
    - Short-term Borrowing Repaid: Amount paid back on short-term debt.
    - Ending Cash Balance: The conclusion of cash availability for the quarter.
    - Minimum Cash Balance: Target cash to maintain at the end of each quarter.
    - Cumulative Surplus/Deficit: Total surplus or deficits calculated again for this analysis.

Summary of Cash Flow Management

• Tracking cash flow is essential for maintaining solvency and planning for the financial future of the business.

• Creating a foolproof cash budget and short-term financing plan helps ensure that the business meets its operational needs without excessive borrowing or risk of insolvency.

Session Wrap-up

• Review key concepts learned regarding cash flow forecasting, budgeting, and the importance of a solid short-term financial plan.

• Prepare to apply these financial planning techniques to real-world business scenarios.