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Compound & Prosper

GEK2507Frederick H. Willeboordse

phyfhw@nus.edu.sg

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Cash Budget

Lecture 4

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Excel

Understand the Cash Budget

Make a simple Cash Budget with MS-Excel

Today’s Lecture

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Excel Basics – ANDThe AND function is one of the basic logical functions. It returns TRUE when all the conditions are fulfilled and FALSE otherwise.

One can check for as many logical conditions as one wants (well up to 30 or so … ).

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Excel Basics – AND

One can also compare words (these are often called ‘strings’ in computer lingo.

However, watch out! In the formula, you need to add quotes to indicate to Excel that you are dealing with a word.

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Excel Basics – ORThe OR function is one of the basic logical functions. It returns TRUE when one or more of the conditions are fulfilled and FALSE otherwise.

One can check for as many logical conditions as one wants (well up to 30 or so … ).

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Excel Basics – SUMIF

The conditional sum is very useful to extract certain data.One good example is that of commissions given in the Excel help system.

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A Cash Budget states all the cash inflows and outflows for a certain period of time.

Sometimes the cash budget is also called “Statement of budgeted cash receipts and disbursements”.

A cash budget is not the same as an income statement or a cash flow statement.

What is a Cash Budget?

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Main Differences with the Income Statement:

– Depreciation is not included

– Loans are included

– Dividends are included

The Cash Budget is about “Cash”! All dollars in or out should be listed here, regardless of what they are for.

What is a Cash Budget?

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The main elements of a cash budget are:

– Cash collections from customers (IN)

– Cash disbursements for purchases (OUT)

– Cash disbursements for operating expenses (OUT)

– Capital Expenditures (OUT)

– Loans (IN)

– Loan repayments (OUT)

As you can see everything is either IN or OUT.

In that sense it’s really easy!

Main Elements of a Cash Budget

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Let us look at a company that expects the following:

– Sales are expected to grow at 7% a month

– 20% of sales are COD (cash/check on delivery)

– 30% of sales are paid during the month following the sale

– 50% of sales are paid in the second month after the sale

– Manpower and fixed costs are 20% of sales

– Inventory purchases are 50% of the following month’s sales

– Loan repayments of $2000 per month

Indeed, this seems to be pretty complicated.

Fortunately ….

Sounds Complicated

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Fortunately, it’s not as bad as it looks if we approachthe problem systematically by entering all the itemsone by one into Excel.

Let us start with entering the sales

Like a vegetable stall, one by one …

Fortunately not …

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A B C D E F G H I J2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 X

9 X etc10 X etc11 X =F7*1.07 (April sales + 7%)12 X =E7*1.07 (March sales + 7%)13 X =D7*1.07 (Feb sales + 7%)14 given initial sales (no formula)

Cash Budget April to July

We only need the initial sales in February. The rest is calculated with a simple formula.

Input

Cash Budget – Enter Sales

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A B C D E F G H I J2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2000 2140 2290 2450 2622 280510 X

11 X etc12 X etc13 X =G7*0.2 (20% of Sales)

X =F7*0.2 (20% of Sales)X =E7*0.2 (20% of Sales)

=D7*0.2 (20% of Sales)

Cash Budget April to July

This is completely derived with formulas!

Enter Sales COD Receipts

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A B C D E F G H I J2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2000 2140 2290 2450 2622 280510 One month 3000 3210 3435 3675 39321112 X

13 X etcX etc

X =F7*0.3 (30% of April Sales)X =E7*0.3 (30% of March Sales)

=D7*0.3 (30% of Feb Sales)

Cash Budget April to July

Again, this is completely derived with formulas!

Enter On-credit-sales Receipts

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A B C D E F G H I J2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2000 2140 2290 2450 2622 280510 One month 3000 3210 3435 3675 393211 Two months 5000 5350 5725 61251213 X

14 X etc15 X etc16 X =E7*0.5 (50% of April Sales)

=D7*0.5 (50% of Feb Sales)

Cash Budget April to July

Again, this is completely derived with formulas!

Enter On-credit-sales Receipts

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A B C D E F G H I J2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2000 2140 2290 2450 2622 280510 One month 3000 3210 3435 3675 393211 Two months 5000 5350 5725 612512 Total collections 10500 11235 12021 1286313 X

14 X etc15 X etc16 X =SUM(G9:G11)

=SUM(F9:F11)

Cash Budget April to July

Again, this is completely derived with formulas!

Lucky

we h

ave a

sprea

dshe

et!

Enter Totals

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A B C D E F G H I J2345 Feb March April May June July67 Sales 10000 10700 11449 12250 13108 140268 Collections9 Cash/Check 2,000 2,140 2,290 2,450 2,622 2,80510 One month 3,000 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 ` =G7*0.514 Manpower/Fixed 2,290 ` =F7*0.215 Loan Repayment 2,000 ` Given16 Total Payments 10,415 ` =SUM(F13:F15)17 Net Cash Flow 85 ` =F12-F16

Cash Budget April to July

Mostly formulas, except for the loan repayments

Enter Cash Outflow

Note: Data from Mayused in April.

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A B C D E F G H I J2345 Feb March April May June July Aug67 Sales 10000 10700 11449 12250 13108 14026 150078 Collections9 Cash/Check 2,000 2,140 2,290 2,450 2,622 2,80510 One month 3,000 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 6,554 7,013 7,50414 Manpower/Fixed 2,290 2,450 2,622 2,80515 Loan Repayment 2,000 2,000 2,000 2,00016 Total Payments 10,415 11,004 11,634 12,30917 Net Cash Flow 85 231 387 554

Cash Budget April to July

Copy and Paste the rest.Great, but ugly … let’s clean this up again.

Obtain Totals

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A B C D E F G H I J2345 Feb March April May June July Aug67 Sales 10000 10700 11449 12250 13108 14026 1500789 Cash/Check 2,290 2,450 2,622 2,80510 One month 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 6,554 7,013 7,50414 Manpower/Fixed 2,290 2,450 2,622 2,80515 Loan Repayment 2,000 2,000 2,000 2,00016 Total Payments 10,415 11,004 11,634 12,30917 Net Cash Flow 85 231 387 554

Cash Budget April to July

This is nice, but it does not really reflect the cash position.

How much dowe have?

Cash Budget

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The Ending Balance is an important indicator of the company’s cash position. It is calculated as:

+ Beginning Cash Balance+ Total Collections (Total Cash IN)- Total Disbursements (Total Cash OUT)= Unadjusted Cash Balance+ Current Borrowing= Ending Balance

Let us add these elements to our previous Cash Balance

Ending Balance

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A B C D E F G H I J2345 Feb March April May June July Aug6 Beginning Cash 20,000 20,085 ` =F207 Sales 10,000 10,700 11,449 12,250 13,108 14,026 15,00789 Cash/Check 2,290 2,450 2,622 2,80510 One month 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 6,554 7,013 7,50414 Manpower/Fixed 2,290 2,450 2,622 2,80515 Loan Repayment 2,000 2,000 2,000 2,00016 Total Payments 10,415 11,004 11,634 12,30917 Net Cash Flow 85 231 387 554

18 Unadjusted Cash Balance 20,085 ` =F6+F1719 Borrowing 0 ` =IF(F18<0,-F18,0)20 Ending Cash 20,085 ` =F18+F19

Cash Budget April to July

Ending Cash

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A B C D E F G H I J2345 Feb March April May June July Aug6 Beginning Cash 20,000 20,085 20,316 20,7027 Sales 10,000 10,700 11,449 12,250 13,108 14,026 15,00789 Cash/Check 2,290 2,450 2,622 2,80510 One month 3,210 3,435 3,675 3,93211 Two months 5,000 5,350 5,725 6,12512 Total collections 10,500 11,235 12,021 12,86313 Purchases 6,125 6,554 7,013 7,50414 Manpower/Fixed 2,290 2,450 2,622 2,80515 Loan Repayment 2,000 2,000 2,000 2,00016 Total Payments 10,415 11,004 11,634 12,30917 Net Cash Flow 85 231 387 554

18 Unadjusted Cash Balance 20,085 20,316 20,702 21,25619 Borrowing 0 0 0 020 Ending Cash 20,085 20,316 20,702 21,256

Cash Budget April to July

Time for anap!?

Ending Cash

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Not quite!

This is nice, BUT, the assumptions are all fixed.Since almost all of the calculations are done byformulas, we can use this for investigating scenarios!

Let’s take out all the numbers which were insertedmanually.

Scenarios!!

Done?

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A B C D E F G H I2345 Sales Growth 7% %COD 20% % Inv 50% Loan rep 2,0006 Initial Sales 10,000 % 1mo 30% % Man 20%7 Begiining Cash 20,000 % 2mo 50%89 Feb March April May June July Aug10 Beginning Cash 20,000 20,085 20,316 20,70211 Sales 10,000 10,700 11,449 12,250 13,108 14,026 15,00712 Cash/Check 2,290 2,450 2,622 2,80513 One month 3,210 3,435 3,675 3,93214 Two months 5,000 5,350 5,725 6,12515 Total collections 10,500 11,235 12,021 12,86316 Purchases 6,125 6,554 7,013 7,50417 Manpower/Fixed 2,290 2,450 2,622 2,80518 Loan Repayment 2,000 2,000 2,000 2,00019 Total Payments 10,415 11,004 11,634 12,30920 Net Cash Flow 85 231 387 554

21 Unadjusted Cash Balance 20,085 20,316 20,702 21,25622 Borrowing 0 0 0 023 Ending Cash 20,085 20,316 20,702 21,256

Cash Budget April to JulyInputs

Scenarios

Excel doesthe work

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All the numbers in the Cash Budget thus only depend on the assumptions in cells B5..I7.

Now we can easily see what happens if e.g. the Growth increases to 11% and the manpower costs to 25% but the beginning cash is reduced to 1000.

A Better Cash Budget

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A B C D E F G H I2345 Sales Growth 11% %COD 20% % Inv 50% Loan rep 2,0006 Initial Sales 10,000 % 1mo 30% % Man 25%7 Begining Cash 1,000 % 2mo 50%89 Feb March April May June July Aug10 Beginning Cash 1,000 0 0 011 Sales 10,000 11,100 12,321 13,676 15,181 16,851 18,70412 Cash/Check 2,464 2,735 3,036 3,37013 One month 3,330 3,696 4,103 4,55414 Two months 5,000 5,550 6,161 6,83815 Total collections 10,794 11,982 13,300 14,76216 Purchases 6,838 7,590 8,425 9,35217 Manpower/Fixed 3,080 3,419 3,795 4,21318 Loan Repayment 2,000 2,000 2,000 2,00019 Total Payments 11,918 13,009 14,220 15,56520 Net Cash Flow -1,124 -1,028 -921 -802

21 Unadjusted Cash Balance -124 -1,028 -921 -80222 Borrowing 124 1,028 921 80223 Ending Cash 0 0 0 0

Cash Budget April to July

Cash Budget

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Great we have achieved a lot, but we can still make this a bit better. The very least we would need to pay interest on the new loans. Also, in order to avoid bounced checks etc., we should have a minimum sum in the bank.

Let us add these requirements.

A Better Cash Budget

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A B C D E F G H I

234 Sales Growth 11% %COD 20% % Inv 50% Old Loan 2,0005 Initial Sales 10,000 % 1mo 30% % Man 20% Interest on 1%6 Begining Cash 1,000 % 2mo 50% new Loan7 Minimum Cash 1,00089 Feb March April May June July Aug10 Beginning Cash 1,000 1,000 1,000 1,00011 Sales 10,000 11,100 12,321 13,676 15,181 16,851 18,70412 Cash/Check 2,464 2,735 3,036 3,37013 One month 3,330 3,696 4,103 4,55414 Two months 5,000 5,550 6,161 6,83815 Total collections 10,794 11,982 13,300 14,76216 Purchases 6,838 7,590 8,425 9,35217 Manpower/Fixed 2,464 2,735 3,036 3,37018 Loan Repayments 2,000 2,005 2,009 2,01019 Total Payments 11,302 12,331 13,470 14,73220 Net Cash Flow -508 -349 -170 30

21 Unadjusted Cash Balance 492 651 830 1,03022 Borrowing 508 349 170 023 Ending Cash 1,000 1,000 1,000 1,030

Total Loan 0 508 857 1,028 1,028

Cash Budget April to July -Golden Dragon Double Win International

Cash Budget

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How was this done?

In E22, the formula used was:=IF(E21<$C$7,$C$7-E21,0)

Then on a auxiliary row, the total new loans are being kept track off.The new formula for loan repayments then becomes:

=$I$4+$I$5*D25

A Better Cash Budget

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We not only accomplished budgeting for all this:

– Sales are expected to grow at 7% a month

– 20% of sales are COD (cash/check on delivery)

– 30% of sales are paid during the month following the sale

– 50% of sales are paid in the second month after the sale

– Manpower and fixed costs are 20% of sales

– Inventory purchases are 50% of the following month’s sales

– Loan repayments of $2000 per month

But we also

Amazing!

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..added:

– What-IF Scenarios

– Borrowing requirements

– Maintenance of a minimum sum

– Effects of interest of new loans on cash flow

Good use of simple tools can be powerful!

Amazing!

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What-if: Growth 38%A B C D E F G H I

234 Sales Growth 38% %COD 20% % Inv 50% Old Loan 2,0005 Initial Sales 10,000 % 1mo 30% % Man 25% Interest on 1%6 Begining Cash 10,010 % 2mo 50% new Loan7 Minimum Cash 10,00089 Feb March April May June July Aug10 Beginning Cash 10,010 10,000 10,000 10,00011 Sales 10,000 13,800 19,044 26,281 36,267 50,049 69,06812 Cash/Check 3,809 5,256 7,253 10,01013 One month 4,140 5,713 7,884 10,88014 Two months 5,000 6,900 9,522 13,14015 Total collections 12,949 17,869 24,660 34,03016 Purchases 13,140 18,134 25,025 34,53417 Manpower/Fixed 4,761 6,570 9,067 12,51218 Loan Repayments 2,000 2,069 2,158 2,27419 Total Payments 19,901 26,773 36,250 49,32020 Net Cash Flow -6,953 -8,904 -11,590 -15,290

21 Unadjusted Cash Balance 3,057 1,096 -1,590 -5,29022 Borrowing 6,943 8,904 11,590 15,29023 Ending Cash 10,000 10,000 10,000 10,000

Total Loan 0 6,943 15,847 27,437 42,727

Cash Budget April to July -Golden Dragon Double Win International

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A B C D E F G H I

234 Sales Growth 38% %COD 20% % Inv 50% Old Loan 2,0005 Initial Sales 10,000 % 1mo 30% % Man 25% Interest on 1%6 Begining Cash 10,000 % 2mo 50% new Loan7 Minimum Cash 10,00089 Aug Sep Oct Nov Dec Jan Feb10 Beginning Cash 10,000 10,000 10,000 10,00011 Sales 69,068 95,314 131,533 181,516 250,492 345,678 477,03612 Cash/Check 26,307 36,303 50,098 69,13613 One month 28,594 39,460 54,455 75,14714 Two months 34,534 47,657 65,767 90,75815 Total collections 89,435 123,420 170,320 235,04116 Purchases 90,758 125,246 172,839 238,51817 Manpower/Fixed 32,883 45,379 62,623 86,42018 Loan Repayments 2,371 2,736 3,236 3,91919 Total Payments 126,012 173,361 238,698 328,85720 Net Cash Flow -36,577 -49,941 -68,378 -93,816

21 Unadjusted -26,577 -39,941 -58,378 -83,81622 Borrowing 36,577 49,941 68,378 93,81623 Ending Cash 10,000 10,000 10,000 10,000

Total Loan 37052 73,629 123,570 191,948 285,764

Cash Budget April to July -Golden Dragon Double Win International

BorrowingGrows rapidly!

What-if: Growth 38%

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A B C D E F G H I

234 Sales Growth 0% %COD 20% % Inv 50% Old Loan 2,0005 Initial Sales 10,000 % 1mo 30% % Man 25% Interest on 1%6 Begining Cash 10,000 % 2mo 50% new Loan7 Minimum Cash 10,00089 Dec Jan Feb Mar Apr May Jun10 Beginning Cash 10,000 43,969 125,531 207,09311 Sales 250,492 345,678 345,678 345,678 345,678 345,678 345,67812 Cash/Check 69,136 69,136 69,136 69,13613 One month 103,703 103,703 103,703 103,70314 Two months 125,246 172,839 172,839 172,83915 Total collections 298,085 345,678 345,678 345,67816 Purchases 172,839 172,839 172,839 172,83917 Manpower/Fixed 86,420 86,420 86,420 86,42018 Loan Repayments 4,858 4,858 4,858 4,85819 Total Payments 264,116 264,116 264,116 264,11620 Net Cash Flow 33,969 81,562 81,562 81,562

21 Unadjusted 43,969 125,531 207,093 288,65422 Borrowing 0 0 0 023 Ending Cash 43,969 125,531 207,093 288,654

Total Loan 285,764 285,764 285,764 285,764 285,764

Cash Budget April to July -Golden Dragon Double Win InternationalBut once it stopsgrowing, cash flowbecomes positiverapidly.

What-if: Growth now 0%

Of course, usually we would want to reduce the loan with (some of) the cash.

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..indeed:

– New cash requirements grow rapidly

– If profitability growth cannot keep pace there will be trouble

– Even though profitable, this company could go bust in a cash crunch

– On the other hand, if growth slows, profits may become large

Good use of simple tools can be powerful!

May depend on asound analysis

Amazing!

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The Cash Budget shows the cash requirements of a company

Even though the task accomplished is rather complex, it is surprisingly easy to do with Excel when doing things step by step.

Key Points of the Day