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): 2 3 4 5 Sales $1,210 $1,510 $1,560 $1,360 $1,610 Total cash collections $1,210 $1,260 $1,310 $1,310 You also have the following information about Mooney Equipment: . In any given period, Mooney's purchases from suppliers generally account for 70% of the expected sales in the next period, and wages, supplies, and taxes are expected to be 15% of next period's sales . In the third quarter, Mooney expects to expand one of its plants, which will require an additional $1,070 million investment . Every quarter, Mooney pays $60 million in interest and dividend payments to long-term debt and equity investors Mooney prefers to keep a minimum target cash balance of at least $14 million at all times Using the preceding information, answer the following questions: What is the net cash inflow that Mooney expects in the first quarter (Q1)? If Mooney is beginning this year with a cash balance of $35 million and expects to maintain a minimum target cash balance of at least $14 million, what will be its likely cash balance at the end of the year (after Q4)? . What is the maximum investable funds that the firm expects to have in the next year? . What is the largest cash deficit that the firm expects to suffer in the next year?

Explanation / Answer

Q1 Q2 Q3 Q4 Q5 Sales 1210 1510 1560 1360 1610 Beginning balance 35.0 -98.5 -224.5 -1200.5 Total cash collections 1210.0 1260.0 1310.0 1310.0 Total cash available 1245.0 1161.5 1085.5 109.5 Cash disbursements: Payments to suppliers 1057.0 1092.0 952.0 1127.0 Payments to wages, supplies and taxes 226.5 234.0 204.0 241.5 Payment for plant expansion 1070.0 Interest and dividend payments 60.0 60.0 60.0 60.0 Total disbursements 1343.5 1386.0 2286.0 1428.5 Ending cash balance -98.5 -224.5 -1200.5 -1319.0 Target cash balance 14.0 14.0 14.0 14.0 Surplus/Deficit -112.5 -238.5 -1214.5 -1333.0 ANSWERS TO QUESTIONS: 1 Net cash inflow in the 1st Qtr = 1210.0-1343.5 = -133.5 2 Likely cash balance at the end of Q4 14.0 (As it is a deficit through out, it is presumed Mooney will borrow to enough to maintain the minimum cash balance of $14.0 million). 3 Maximum investible funds 0 (As it is a deficit through out the year, there would be no funds to invest) 4 Largest cash deficit expected is in the 4th Qtr = -1333.0

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