7. Cash budget Aa Aa The cash budget is considered the primary forecasting tool

Question

7. Cash budget Aa Aa The cash budget is considered the primary forecasting tool when firms try to estimate their cash flows and figure out if they are likely to need additional cash flows or to generate surplus cash Consider the case of Mooney Equipment: Mooney Equipment is putting together its cash budget for the following year and has forecasted expected cash collections over the next five quarters (one year plus the first quarter of the next year). The cash collection estimates are based on sales projections and expected collection of receivables. The sales and cash collection estimates are shown in the following table (in millions of dollars): Q1 Q3 $1,320 $1,620 1,670 $1,470 $1,720 Q2 Q4 Sales Total cash collections $1,320 $1,370 $1,420 $1,420 You also have the following information about Mooney Equipment: Sess

Explanation / Answer

1) Net Cash Flow that expects in the third quarter is

Answer: -$1,076

2) Likely cash balance at end of Q4 is

Answer = -($237 + $234 + $1,076 + $230) + $39

............= -$1,738

3) Maximum investible fund in next year is nill

Answer = -$230 + $16

.............= -$214

4) Largest cash deficit that firm expects to suffer in next year is in third quarter

Largest Cash deficit = -($237 + $234 + $1,076 + $230) + $39 - $16

.................................= -$1,754

5. True. If the firm is not able to generate cash to sustain its operations, it will resort to external funding.

Particulars Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 4 Sales $1,320 $1,620 $1,670 $1,470 $1,720 Total Cash Collections $1,320 $1,370 $1,420 $1,420 Purchases (78% of Next Period Sales) $1,264 $1,303 $1,147 $1,342 Wages, Supplies and taxes (15% of next period sale) $243 $251 $221 $258 Additional Investment in Equipment $1,078 Interest and Dividend $50 $50 $50 $50 Cash Balance ($237.00) ($234.00) ($1,076.00) ($230.00)

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