FORECASTING SHORT –

TERM OPERATING
FINANCIAL REQUIREMENT

PRETZEL L. RAGONJAN
BA 217
Learning Objectives
1.Understand the sources and uses of cash that
are used in building a cash budget.

2.Explain how sales forecasts are used to predict

cash inflow.

3.Understand how production costs vary in terms

of cash flow timing.

4.Explain possible ways to cover cash deficits

and invest cash surplus.

5.Prepare a pro forma income statement and a

pro forma balance sheet
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 Sources and Uses of Cash

• Cash is considered to be the life-blood of a business

> Cash shortages can be stifling and expensive
while excesses can lead to poor returns.

• Since most businesses do not function on a pure cash

basis, it is critical for them to forecast their needs
for cash in advance.

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Sources and Uses of Cash
Bridge Water Pumps and Filters, Cash Budget for First Six Months of 2012
($ in thousands)
Cash Flow Jan February March April May June
Cash Receipts $360 $330 $340 $365 $395 $374
Cash Disbursements $359 $325 $394 $379 $373 $359
Net Cash Flow $1 $5 -$54 -$14 $22 $15
Beginning Cash $40 $41 $46 -$8 -$22 $0
Ending Cash $41 $46 -$8 -$22 $0 $15
Reserve (for cash) $15 $15 $15 $15 $15 $15
Excess (short fall) $26 $31 (23) ($37) ($15) $0

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 Sources and Uses of Cash
Cash inflows ad cash Cash
outflows for a company. outflows and
Expenditures

Cash Inflows
Sources of Cash and Receipts

Cash Sales from Products and Uses of Cash

Services Cash purchases(supplies, inventories,
Accounts Receivables(mainly credit raw materials)
sales) Accounts payable(to suppliers)
Cash sales of equipment and other Wages and salaries
Rent, lease or mortgage payments
assets Utility payments(sometimes called
Funding sources(bank loans, bond overhead
sales, stock sales Shipping cost
Interest payments, dividend payments
Paying of debts(loans and bonds 5
Repurchases of stocks
Cash Budgeting and the Sales
Forecast
•Sales revenue
base variable driving almost all
other items in the cash budget,

•There is usually a time lag

between when a sale is made
and when the cash receipts come
in

•Need internal data as well as

external data sources for objective
sales forecasts.

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Cash Inflow from Sales
• Firms typically sell products and services partially
for cash and partially on credit.

• An analysis of a firm’s collection policy can help

project cash inflow from sales.

• It is quite common for firms to collect some of their

receivables in the 2 months
following the sale, i.e. November 2008’s credit
sales will be partially collected in December and
January.
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Cash Inflow from Sales (continued)
Table 12.3 Bridge Water Pumps and Filters Cash Flow from Sales:
January, February, and March 2012 Cash Flow Estimates

Managers often figure in

a small percentage of the
forecasted sales as bad
debts when preparing a
cash budget.

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Other Cash Receipts

• Besides sales, which are the main

contributor to a firm’s cash inflow, need to
forecast the timing and magnitude of other
occasional sources of cash such as
– asset sales,
– funds raised through issuance and sale of
securities, and
– income earned on investments (dividends,
interest, etc.).

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Cash Outflow from Production

• The magnitude and timing of the various cash disbursements

of a firm depends mainly on forecasted sales.
– Payments for raw materials, labor costs, overheads such
as utilities and rent, shipping costs, etc.

• The cash budget can be used as a handy planning

document to keep track of the projected disbursements.

• Depreciation is merely a tax write-off, not a cash

disbursement, so should not be included in a cash budget.

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The Cash Forecast: 1. Accounts payables for materials and
Short-Term Deficits and supplies;
Short-term Surpluses
2. Salaries, wages, taxes, other operating
expenses;

3. Capital expenditures for plant,

equipment, and machinery; and

4. Dividends, interest and floatation

cost payments
related to raising and servicing of
capital.

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Funding Cash Deficits

Cash shortfalls can be handled in 4 ways:

1. Cash from savings

2. Unsecured loans (letters of credit)

3. Secured loans (using accounts receivable or

inventories)

4. Other sources (commercial paper, trade credit,

or banker’s acceptance).
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Investing Cash Surpluses

When a company has excess funds, it has 4 options:

1. Put the surplus in a savings account or invest it in
marketable securities.
2. Repay lenders and owners (retire debt early or pay
extra dividends).
3. Replace aging assets.
4. Invest in the company, accepting positive net
present value projects

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Planning with Pro Forma Financial
Statements

• Cash budgeting, is only

one aspect of short-
term financial planning.
Planning with Pro Forma Financial Statements

– For example, let’s say that the cash balance for the
prior year is $2 million and the total assets is $100m.
So cash is 2% of total assets.

– For the Pro Forma Balance Sheet, we would forecast

cash as 2% of the forecasted total assets as well, i.e.
if total assets are forecasted to increase by
20%$120mCash would be forecasted to be
0.02*120m = $2.4m.

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Pro Forma
Income
Statement
2011

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Pro Forma Balance Sheet

Each prior year’s balance sheet item

is expressed as a percent of total
assets, and then multiplied by the
forecasted total assets figure for the
next period.

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Pro Forma Balance Sheet 2011

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Sh Pro Forma Balance Sheet eet

Based on the following assumptions, a pro forma balance sheet is developed

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Pro Forma Balance Sheet

Pro Forma Cash

Flow Statement
• Finally, the pro
forma cash flow
statement is
prepared to tie
together all
the changes in
operating,
investment,
and financing
cash flows.

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Short term financing: Advantages: Disadvantages

Advantages:

> Could be obtained quicker.

> The amount raised can be flexible.
> Usually cheaper. (comparing with long-term finance)

Disadvantages

> High solvency risk:

> Need to be repaid in a short period.
> High refinance risk: face highly volatile short-term

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Short-term financing strategies

 Moderate Approach: matching

maturities.

 Aggressive Approach:

 Conservative Approach:

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The Short-Term Financial Plan
 The most common way to finance a temporary cash
deficit to arrange a short-term loan.

 Unsecured Loans -line of credit down at the bank

 Secured Loans - accounts receivable financing can

be either assigned or factored.

 Inventory loans use inventory as collateral.

 Other Sources - Banker’s acceptances

 Commercial paper. 23
THANK YOU for
listening!

PRETZEL L. RAGONJAN
MBA - PAGUDPUD