Universidad Ana G Méndez

Division of Business, Tourism & Entrepreneurship

Fina 202 – Business Finance
Chapter 4- Long and Short Term Financial Planning
Assignment 4 LSFP: Chapter Questions & Exercise
Due Date: Monday, November 8, 2021; 10:00am

Part I

1. What is the financial planning process? Contrast long-term (strategic) financial plans with
short-term (operating) financial plans.
The financial planning process is an important aspect of the firm’s operations because it
provides road maps for guiding, coordinating, and controlling the firm’s actions to achieve its
objectives. The process begins with long-term, or strategic, financial plans. These, in turn, guide
the formulation of short term, or operating, plans and budgets. Generally, the short-term plans
and budgets implement the firm’s long-term strategic objectives. Long-term (strategic) financial
plans lay out a company’s financial actions and the anticipated impact of those actions over
periods ranging from 2-10 years. Short-term (operating) financial plans specify short-term
financial actions and the anticipated impact of those actions. These plans most often cover 1-2
year period.

2. Which three statements result as part of the short-term (operating) financial planning
process?
Key outputs resulting from the short-term financial planning process are operating budgets, the
cash budget, and the pro forma financial statements

3. What is the purpose of the cash budget? What role does the sales fore-cast play in its
preparation?
The cash budget, or cash forecast, is a statement of the firm’s planned inflows and outflows of
cash. The sales forecast is the prediction of the firm’s sales over a give period of time. With this
prediction the cash budget can be determined more accurately.

4. Briefly describe the basic format of the cash budget.

Typically, the cash budget is designed to cover a 1-year period, divides into smaller
intervals. The number and type of intervals depend on the nature of the business.

5. How can the two “bottom lines” of the cash budget be used to deter-mine the firm’s short-
term borrowing and investment requirements?
Required total financing or the excess cash balance. If the ending cash is less than the minimum
cash balance, financing is required. If the ending cash is greater than the minimum cash
balance, excess cash exists.
6. What is the cause of uncertainty in the cash budget, and what two techniques can be used to
cope with this uncertainty?
The uncertainty is caused because of the variability of the cash flow outcomes that may actually
occur. One-way is to prepare several cash budgets (“What it”)- based on pessimistic, most
likely, and optimistic forecasts. From this range of cash flows, the financial manager can
determine the amount of financing necessary to cover the most adverse situation.
A second and much more sophisticated way of coping with uncertainty in the cash budget is
simulation. By simulating the occurrence of sales and other uncertain event, the firm can
develop a probability distribution of its ending cash flows of each month.

Part II

A. Projected Cash Receipts

Maris Brothers Inc. needs a cash receipts schedule for the months of April, May, and June.
Actual Sales: February = $500,000, March = $500,000.
Forecast Sales: April =$560,000, May= $610,000, June= $650,000, July= $650,000
Assuming that sales are the only source of cash inflows and that 30% of them are for cash and the
remainder are collected evenly over the following 2 months.

Prepare a schedule of projected cash receipts for April, May and June. Use the format of Table 4.8

Schedule of projected cash receipts

February March April May June

sales forecast 500,000 500,000 560,000 610,000 650,000

cash sale (30%) 150,000 150,000 168,000 183,000 195,000

collections of A/R

Lagged 1 month (30%) 150,000 150,000 168,000 183,000

Lagged 2 month (30%) 150,000 168,000 183,000

Other Cash receipts

Total Cash Receips 150,000 300,000 468,000 519,000 561,000

B. Projected Cash Disbursements

Maris Brothers Inc. needs a cash disbursement schedule for the months of April, May, and June. The
following information was collected from financial records:
Purchases: Purchases are calculated as 50% of the next month’s sales, 15% of purchases are made in
cash, 60% of purchases are paid for 1 month after purchase, and the remaining 25% of purchases are
paid for 2 months after purchase.
Rent: The firm pays rent of $9,000 per month.
Wages and salaries: Base wage and salary costs are fixed at $8,500 per month plus a variable cost of
5.5% of the current month’s sales.
Taxes: A tax payment of $45,600 is due in June.
Fixed asset outlays: New equipment costing $61,000 will be bought and paid for in May.
Principal payments: $35,000 due in June.
Interest payments: $3,000 due in June.
Cash dividends: $9,500 will be paid in April.

Prepare a schedule of projected cash disbursements for April, May and June. Use the format of Table
4.9

Maris Brothers
Cash Disbursements Schedule

Particulars April May June

Sales $560,000.00 $610,000.00 $650,000.00

Purchases $305,000.00 $325,000.00 $325,000.00

15% $45,750.00 $48,750.00 $48,750.00

60% $201,600.00 $183,000.00 $195,000.00
25% $75,000.00 $75,000.00 $76,250.00
Rent $9,000.00 $9,000.00 $9,000.00
Wages & Salaries $39,300.00 $42,050.00 $44,250.00
Taxes $45,600.00
Fixed Asset Outlay $61,000.00
Interest Payment $3,000.00
Principal payments $35,000.00
Cash dividend $9,500.00
Principal payments $35,000.00

Total cash
disbursements $380,150.00 $418,800.00 $491,850.00
C. Net Cash Flows

Prepare a schedule to compute de Net Cash Flows for April, May and June of Maris Brothers Inc.

D. In the preparation of a quarterly cash budget, the following revenue and cost information
have been compiled.

Month Sales Purchase

August (actual) $3,000,000 $3,500,000
September (actual) 5,000,000 2,500,000
October (forecast) 1,750,000 800,000
November (forecast) 2,000,000 950,000
December (forecast 2,600,000 1,300,000

∙ The firm collects 60 percent of sales for cash and 40 percent of its sales one month later.

∙ Interest income of $50,000 on marketable securities will be received in December.

∙ The firm pays cash for 40 percent of its purchases.

∙ The firm pays for 60 percent of its purchases the following month.

∙ Salaries and wages amount to 15 percent of the preceding month's sales.

∙ Sales commissions amount to 2 percent of the preceding month's sales.

∙ Lease payments of $100,000 must be made each month.

∙ A principal and interest payment on an outstanding loan is due in December of $150,000.

∙ The firm pays dividends of $50,000 at the end of the quarter.

∙ Fixed assets costing $600,000 will be purchased in December.

∙ Depreciation expense each month of $45,000.

∙ The firm has a beginning cash balance in October of $100,000 and maintains a minimum
cash balance of $200,000.
Prepare and evaluate a cash budget for the months of October, November, and December
based on the information shown above.

Cash Budget
Month August September October November December

Sales 3,000,000 5,000,000 1,750,000 2,000,000 2,600,000

Cash (60%) 1,800,000 3,000,000 1,050,000 1,200,000 1,560,000

1 mo. (40%) 1,200,000 2,000,000 700,000 800,000

Interest 50,000

Total Receipts 4,200,000 3,050,000 1,900,000 2,360,000

Purchase 3,500,000 2,500,000 800,000 950,000 1,300,000

Cash (40%) 1,400,000 1,000,000 320,000 380,000 520,000

1 mo. (60%) 2,100,000 1,500,000 480,000 570,000

Salaries & Wages 450,000 750,000 262,500 300,000

Sales Commsission 60,000 100,000 35,000 40,000

Lease Payments 100,000 100,000 100,000 100,000

Princ & Interest
Pay 150,000

Cash Diviends 50,000

Fixed assets
purchase 600,000
Total
Disbursements 3,710,000 2,770,000 1,257,500 2,330,000

Net Cash Flow 490,000 280,000 642,500 30,000

Add: Beg. Cash 100,000 380,000 1,022,500

Ending Cash 380,000 1,022,500 1,052,500

Less: Min Cash 200,000 200,000 200,000

Required Fin.

Excess Cash 180,000 822,500 852,500