.

BUDGET STATEMENT OF CASH FLOW

INTRODUCTION

This assignment presents the key aspects of cash planning and budgeting as a
liquid asset of the company.

The sales budget, the production budget, the stock budget and the
investment budget give an idea of the long-term and medium-term financial
needs of the company. Budgetary management, however, is focused on
solving the problem of short-term management of cash resources. From this
perspective, liquid assets are a special type of investment, characterized by
their short life of months, weeks or even days.

Cash flow is an economic income / profit. Financial Management defines

economic income as the difference between cash inflows and all outflows,
whether costs or expenses. In this respect, profitability is measured by the
present value of future free cash flows less the present value of the
investment needed to produce it. From a financial perspective, profitability
reflects risk while accounting profit ignores risk. At the same time, financial
management admits that liabilities cannot be paid with an accounting profit
but with cash.

1. SPECIFICS OF THE CASH FLOWBUDGET

In preparing the cash flow budget we should take into account:

The structure of liquid assets. Liquid assets consist of cash, as well as assets
that can quickly be converted into cash if urgently needed. It should be
emphasized that the cash flow budgets not equal to the sum of the
production and investment budgets. The availability of deferred expenses
results in a discrepancy between the cash flow budget on the one hand, and
production and investment budgets on the other. The management of liquid
assets requires not just the sum of disbursements and receipts within an
operating period.

Incentives forth rational management of liquid assets. At times, every

company generates excess liquid assets that can be stored without
profitable use by the time the company needs it to cover its expenses. This,
however, is related to the cost of surplus investment lost profits. At the
other extreme is the immediate investment of liquid assets, without taking
into account potential liquidity difficulties. Both extremes are equally
unfavorable for the company. Rational management of highly liquid assets
must respect three fundamental principles1-to avoid default to cover its
short-term cash commitments, to avoid bottlenecks and to avoid too much
caution.

Exceeding short-term cash commitments should not be planned. History

knows several cases of crises arising from the use of liquid resources to
cover long-term needs. Changes in the economic environment can result in
inability to cover short-term needs -something that previously seemed
unlikely.

Management of liquid assets should avoid the so-called "bottlenecks"

(shortage of cash in hand).The temporary liquidity shortfalls are subject to
prediction and control. This requires all disbursements and receipts
(revenue and expenditure cash flows) to be kept in a common registry.
Temporary liquidity shortfalls can be costly to the company, if the sources of
the shortfall are expensive -for example, using a bank loan. Problems can
occur with a negative balance of net working capital, too, debt outstanding
problems, etc. Of particular importance for the company is to envisage a
reserve when formulating the cash flow budget. Caution is needed because
of the possibility revenue classified as safe to be delayed and to result in
cash shortages.

2. LIQUID ASSETS REQUIREMENTS

The financial management must be able to assess the future cash
requirements of the company for the next budgetary period –next week,
next month, next quarter or the entire year. There are different approaches
to planning cash requirements -the most common methods are: percentage-
of-sales ,cash turnover and cash budget.

2.1 PERCENTAGE OF SALES

The percentage of sales method calculates working capital requirements.

Basically it correlates of the value of the assets required to support the
projected sales of the company. It includes establishing, based on historical
observations, ratios between sales and certain assets and liabilities. These
ratios are compared to the projected sales to construct financing
requirements

(FR). 𝐹𝑅=(А𝑆∗∆𝑆)−(𝐿𝑆∗∆𝑆)−(𝑅∗𝑆)

where:

S –sales,

A -assets that change with sales,

ΔS –expected change in sales,

L –liabilities that change with sales,

R –ratio of net profit to sales.

2.2. CASH TURNOVER

Another widely used method is the calculation of cash turnover. This
calculation establishes the minimum cash needed at any given time through
the relationship between a company’s annual operating expenditures and its
annual cash turnover ratio. The annual cash turnover ratio equals 360 days
divided by the cash cycle calculated for the company. The minimum cash
required equals annual 14 operating expenses divided by the annual cash
turnover ratio. This calculation assumes that operating expenses include the
cost of goods sold, all operating expenses, interest and dividends and
remain constant from one period to the next.

2.3. CASH FLOW BUDGET (LIQUID ASSETS BUDGET)

The cash flow budgets an instrument for liquidity management. It

determines capital and working capital financing requirements. The key
elements of the cash flow budgetary:

a) The cash required to fund working capital needs;

b) The cash required to fund capital asset acquisitions;

c) The cash required for taxes and dividends;

d) The availability of third party financing;

e) The cost of capital –when it comes to prioritizing investment

Alternatives.
The cash flow budgets used to forecast financing surplus or deficit. Using the
cash flow budget the investor can determine the feasibility of the financial
plan, establish spending priorities, forecast third party financing
requirements and conduct sensitivity analysis under various plan
assumptions. The cash flow budget has direct connections with other
corporate budgets; with the difference that this budget is the shortest as
validity and that the comparability of measurement units, time and
indicators is mandatory for various budget forms.

Disbursement requirements (cash outflows). These needs are sets of such

types of expenses that the company should make in time without looking for
possible delays. The main expenses correspond to the stock budget and the
production budget. A key factor in maintaining balance in the cash flow
budget is to synchronize generated sales with the rhythm of production and
stock. Other disbursements include salaries, trade payables, taxes,
dividends.

The possibilities for making revenue (cash inflows). Revenues are generated
primarily from the sales budget and their dates depend on the terms of
payment set by customers. Meanwhile, the sale of investments (fixed
assets) outside the company, the reduction in net working capital as well as
certain financial transactions (dividends and interest on loans) are also a
source of cash that must be considered. In fact, everything said about liquid
assets -the sources of revenue and outflows of cash can be summarized in a
plan that expresses the functioning of a cash flow budget in a summarized
form. Receipts and disbursements are not perfectly synchronized, which
results in a positive or negative balance of the cash flow budget at the end
of the period.
3. LIQUID ASSETS MANAGEMENT MODELS

There are two major motives to maintain a surplus in the cash flow forecast:

To satisfy the transaction needs of the company. The source of this need is
the normal and continuous process of payment and collection of company’s
receipts.

To maintaining an optimal balance of current accounts of the company.

Typically, banks require a minimum balance on current accounts.
Withdrawals for transaction costs, which lower the balance below the
minimum level results in trading costs -interest costs on loans or for the sale
short-term securities to compensate for decreases in the balance.
Maintaining large balances in these accounts on the other hand generates
lost benefits –losses due to the irrational use of accumulated cash
resources.

SUMMARY

The links between the different internal company budgets are most
clearly reflected in the cash flow budget. Total cash includes cash in
hand, as well as liquid assets that can be immediately turned into cash if
needed. On this basis we could seek the reason why, in the end, a cash
budget does not give the sum of a production and an investment budget.
They can be equal only if all costs are immediately met. Financial
management of cash is not just cash accounting. We can have deadlines
and delays both in terms of receipts and disbursement in cash . For this
reason, a company’s cash resources can be more or less liquid. In this
regard, a cash budget reflects the estimated cash liquidity. As a rule, cash
is related to the short-term commitments of the manager. A company
may repeatedly experience a shortage of cash, but it should not be the
reason to immobilize liquidity. An excessive cash balance reduces the
profitability of the company and is as un favorable as cash shortage.
Short-term cash commitments of the company should not be exceeded.
So neither cash receipts nor cash withdrawals should be affected by
limitations to respond to these short-term commitments. The
management of liquid assets should avoid the so-called "bottlenecks"
(shortage of cash in hand). Bottlenecks can be predicted if the manager
keeps a common registry of all cash disbursements and receipts.
Generally, they are an expression of a temporary shortage of cash. The
same can be very costly if the company uses a bank loan –which is not
necessary if the company is managed well. In this regard, banks are very
demanding to the company and the latter must comply with it. Problems
can occur with a negative balance of net working capital, rigorous
estimates in the trade balance, big debt outstanding problems, etc. Fear
of “bottlenecks” should not lead to excessive caution, which may cause
immobilization of liquid assets. A company that does not believe in its
estimates for turnover, bank credit, and the integrity and solvency of
their customers will tend only to payment in cash.