Cash Budget & Cash

Operating Cycle

AFZAL AHMED, FCA

FINANCE CONTROLLER
NAGAD
 Cash Budget
Cash Budget
A cash budget is a statement in which estimated future cash receipts and payments
are tabulated in such a way as to show the forecast cash balance of a business at
defined intervals

Cash Position Appropriate Management Action

Short-term surplus
Short-term shortfall
 Pay suppliers early to obtain discount
 Attempt to increase sales by increasing
receivables and inventories
 Make short-term investments
 Increase accounts payable (delay payments to
suppliers)
 Reduce receivables, for example by tightening
credit control
 Arrange an overdraft
 Cash Budget

Cash Position Appropriate Management Action

Long-term surplus  Make long-term investments
 Expand or diversify, for example by acquisition
 Increase dividends
 Replace/update non-current assets
 Buy back shares

Long-term shortfall  Raise long-term finance (such as via issue of

share capital)
 Consider selling non-current assets
 Consider shutdown/disinvestment opportunities
 Plan a controlled shut down
 Sample example: Cash Budget

ABC operates a retail business. Purchases are sold at cost plus 331/3%
1. Budgeted Sales, Labour cost and expenses:
Sales (CU) Labour (CU) Expenses
Jan 40,000 3,000 4,000
Feb 60,000 3,000 6,000
Mar 160,000 5,000 7,000
Apr 120,000 4,000 7,000

2. It is management policy to have sufficient inventory in hand at the end of each

month to meet half of next month's sales demand.
3. Suppliers for materials and expenses are paid in the month after the purchases are
made/expenses incurred. Labour is paid in full by the end of each month.
4. Expenses include a monthly depreciation charge of CU2,000.
5. 75% sales are on cash and rest are on one month’s credit
6. The company will buy equipment costing CU18,000 for cash in February and will
pay a dividend of CU20,000 in March. The opening cash balance at 1 February is
CU1,000.
Requirements:
Prepare a cash budget for February and March and comment on the result
 Practice Problem 1

The following information pertains to Zafar Corporation:

Month Sales Purchase
July 40,000 20,000
August 30,000 15,000
September 20,000 10,000
October 50,000 25,000
November 60,000 30,000
December 70,000 35,000

Cash is collected from Customer in following manner:

Month of Sale 20%
Month following the sale 50%
Two Month following the sale 28%
Amount uncollectable 2%
 Practice Problem 1

 Thirty percent of purchases are paid for in cash in the month of purchase, and
the balance is paid the following month. A 2% discount is allowed on
purchases paid for in the month of purchase.
 Labour costs equal 20% of sales; other operating costs of Tk.5,000 per month
including Tk.2,000 of depreciation. Both are paid in the month incurred.
 The cash balance on October 1 is Tk.4,300. A minimum cash balance of
Tk.4,000 is required at the end of the month. Money is borrowed in multiples
of Tk.1,000.
 The company will issue Tk.6,000 of common stock and pay Tk.10,000 as
dividends in October.
 There is no debt outstanding at October 1.

Required:

Prepare a projected cash flow statement in good form for the month ended
October 31.
 Exam Question

Prestige Company, a seller of pressure cooker, has budgeted its activity for
March. The budget information is presented below:
 
1. Sales are Tk. 550,000. All sales are cash.
2. Merchandise inventory on February 28 is Tk. 300,000
3. Budgeted depreciation for March is Tk. 35,000.
4. Cash at bank on March 1 is Tk. 25,000.
5. Selling and administrative expenses are budgeted at Tk. 60,000 for March and are
paid in cash.
6. The planned merchandise inventory on March 31 is Tk. 270,000.
7. The invoice cost for merchandise purchases represents 75% of sales price. All
purchases are paid for in cash.

Required:

From the above information calculate budgeted Cash receipts,

Cash disbursements and Net income of Prestige Company for the month of
March.
 Cash Operating Cycle

The cash operating cycle is the length of time between paying out
cash for raw materials and other input costs and receiving the cash for
goods or services supplied

The length of each element of working capital (receivables, payables and

so on) can be calculated in days and then summed to determine the
length of the cash operating cycle

Liquidity problems can be caused if the cash cycle becomes too long

The forecasting and control of working capital requirements is critical to

the management of the cash operating cycle
Cash Operating Cycle
Cash Operating Cycle
 Calculating the length of Cash operating Cycle

(i) RM holding period = (average Inventory of RM/Annual usage) x 365 =

(ii) Avg Payable payment period = (Avg Trade Payable/Annual purchase) x 365 =

(iii)Avg Production period = ( Avg Inventory of WIP/Annual COS) x 365 =

(iv) Avg Inventory holding period = Avg Inventory of FG/Annual COS) x 365 =

(v) Avg Receivable Collection period = (Average Receivable/Annual Sales) x 365

Length of Cash Cycle = (i) – (ii) + (iii) + (iv) + (v)

 Sample example 1 : Cash Operating Cycle

A Limited has the following estimated figure for the following year:
CU/%
Sales 36,00,000
Average receivables 3,06,000
Gross Profit Margin 25%
Average Inventory
Finished goods 2,00,000
Work in Progress 3,50,000
Raw Materials 1,50,000
Average Payables 1,30,000

Raw materials represent 60% of the production cost. Inventory levels are constant.
Requirements:
Calculate the Cash Operating Cycle for A Limited.
 Assessing the liquidity position
Current Ratio measures the ability to meet short-term liabilities from
easily or quickly realisable current assets.

Current Ratio = (Current Assets/Current Liability)

A higher value for the ratio indicates that the business is more liquid and is
able more easily to meet its current liabilities from its available current
assets.

Sometimes inventory cannot be relied upon as a liquid asset when it is necessary

to meet short-term liabilities. The quick ratio therefore excludes inventory from the
current assets as follows:

Quick Ratio = (Current Assets - Inventory/Current Liability)

 Sample example 2 : Assessing the liquidity position

The following balances were recorded for a business:

CU
Inventories 982,000
Receivables 648,000
Cash 78,000
Payables 653,000

Requirements:
Complete the table below to compare the current ratio and quick (liquidity) ratio
with the average for businesses in the industry. Comment on the results.
Ratio for this Business Industry Average
Current Ratio 2.5:1
Quick Ratio 1.4:1
 Sample example 3 : Assessing the liquidity position

Division S is a retail operation. Its year end working capital comprises inventory
valued at cost, trade receivables of CU 90,000, cash and trade receivables. Its
financial performance Ratios are as follows:
Gross Profit Margin 25%
Current Ratio 2.3:1
Receivable Collection Period 30 days
Payable Payment Period 40 Days
Rate of Inventory Turnover 18 times

Requirement

Calculate the division’s year

 Exam Question 1 : Cash Operating Cycle & Liquidity

Following are the items from Standard Ltd's opening and

closing balance sheet and income statements for the year 2015:
1 January 31 Decmber
Receivables 800,000 900,000
Inventory 600,000 700,000
Payables 200,000 250,000
Credit sales 10,000,000
Cost of Goods sold 6,000,000

Requirements:
What is the approximate length of Cash operating Cycle?
 Exam Question 2 : Cash Operating Cycle & Liquidity

A retailing company earns a gross profit margin of 37.5% on its monthly

sales of Tk. 20,000. In order to generate additional cash, the following
changes are proposed:

Present Proposed
Inventory Holding Period 1.5 months 1.0 month
Payable Payment Period 1.0 month 1.3 months

Requirements:
How much additional cash will be generated at the end of the month if the
above proposal is materialized?
Thank you