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Ac504 Case Study 3

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2.) What are the three sections of a Cash Budget, and what is included in each section?
The three sections of the Cash Budget are the: Cash Reciepts, Cash Disbursements, and Financing, plus the beginning and ending cash balances
• The Cash receipts section is made up of “the company’s principal source(s) of cash, like cash sales and collections from customers on credit sales.” The section displays anticipated receipts of interest and dividends, and “proceeds from planned sales of investments, plant assets, and the company’s capital stock.”
• The Cash disbursements section on the other hand, gives us expected payments for a variety for areas such as inventory, labor, overhead and selling and administrative expenses. Another part that it includes is projected payments for “income taxes, dividends, investments, and plant assets.” There is no record of depreciation here, because depreciation expense doesn’t use cash.
• The Financing section looks at expected borrowings and repayments of “borrowed funds plus interest. This portion is necessary when there is a cash deficiency or when the cash balance is “less than managements’ min required balance.” (Kimmel, 363-364).
Often times, cash budgets have to be prepared multiple times throughout a period, in a sequence, because the ending cash balance of one period, transfers over as the beginning cash balance for the next one. This is one reason why companies create cash budgets on a monthly basis, and get them ready for the next 12 months. (Kimmel, 363-364).
3.) Why is a Cash Budget so vital to a company?
A cash budget helps companies be more effective at managing their cash, that is; knowing what they have available to spend, where the cash is going and if it’s for business purposes, and when they are going over budget. It can even show a company when they will need more financing, before the need for it comes up. Conversely, it can indicate when the company will have excess cash available for investments or other purposes. (Kimmel, 363-364).
The cash budget shows “projected sources and uses of cash. If cash uses exceed internal cash sources, then the company must look for outside sources.” The cash budget is usually only for management’s view and it tells them whether or not they will be able to meet their projected cash needs. (Kimmel, 363-364).
4.) What are the five basic principles of cash management that a company can follow in order to improve its chances of having adequate cash?

This is all information the treasurer would use and be responsible for.
1. Increase the speed of receivables collection- Money that is currently owed is of no use to the business. This means that the quicker that money is paid, the faster those funds can be disbursed. The best thing to do in order to increase the speed of receivables is to shorten the average collection period from the regular 30 days to say 15 days. The key is to do so without enraging or offending/stressing out the customers by forcing them to pay early. Instead, customers can be encouraged and motivated to pay earlier by getting a cash discount with terms like 2/10, n/30.
2. Keep inventory levels low- When inventory on hand is reduced, it saves the cash from being used for things like storage costs, and operating expenses. (electricity, etc) The inventory levels cannot be too low however, or sales will be lost. Maintaining an adequate level is a crucial decision.
3. Monitor payment of liabilities-Utilizing the full payment period is the most savvy. Paying bills too early before they are due; leaves the company without cash for a longer period of time. Yet, paying late is also a problem because it has a direct effect on credit rating and future borrowing abilities. Supplier relationships and supplier viability could be damaged through late payment as well. Discounts offered by suppliers are another good way to conserve cash.
4. Plan the timing of major expenditures. – Making major expenditures and using outside financing enables operations to grow or be maintained. Reviewing the company operating cycle and timing major expenditures accordingly allows outside financing to be obtained. It is most efficient to make major expenditures when there is excess cash, for example, during the off season.
• 5. Invest idle cash. – Excess cash should be invested, even if it’s just overnight, but greatest in a slow period. The investments of idle cash must be highly liquid and risk free, to avoid a cash crisis. A “liquid investment is one with a market in which someone is always willing to buy or sell the investment. A risk-free investment means there is no concern that the party will default on its promise to pay its principal and interest. The most common form of liquid investments is interest-paying U.S. government securities.” (Kimmel, 361-362)

Kimmel, Paul D., Weygandt, Jerry J., Kieso, Donald E. (2011). Financial Accounting: Tools for
Business Decision Making. Hoboken, NJ: John Wiley & Sons, Inc.

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