Lecture on Management of Cash (Lecture 2)

Introduction

• Lecture Source: Open Tuition
• Resource: Free lecture notes available on opentuition.com
• Focus: Second lecture on cash management

Key Areas of Cash Management Calculations

1. Cash Budgets
   • Most important in practice
   • Awareness from earlier exams about general budgeting
   • Monthly budgeting: predicting cash receipts, payments, and bank balance changes
   • Identifying surplus or deficit months
   • Planning for surplus or deficit: capital expenditure delays, dividend delays, etc.

Cash Budget Structure

• Normally done for 6-12 months
• List expected receipts, payments, and calculate monthly cash surplus or deficit
• Forecast end-of-month cash balance

Example Scenario

• Period: November x12 - June x2
• Data: Forecasted cash flow data, including sales, purchases, wages, overheads, dividends, capital expenditure
• Cash Sales: 40% cash, 60% credit (paid 2 months after sale)
• Purchases: Paid month following purchase
• Wages: 75% current month, 25% following month
• Overheads: Paid month after incurred
• Dividends: Paid 3 months after declared
• Capital Expenditure: Paid 2 months after incurred
• Opening Cash Balance: $15,000

Forecasted Cash Receipts and Payments

• Receipts:

  • Cash sales are received in the same month
  • Credit sales received two months later
  • Monthly receipt forecast:
    • January: $92,000
    • February: $112,000
    • March: $122,000
    • April: $138,000
    • May: $148,000
    • June: $162,000

• Payments:

  • Purchases, wages, overheads, dividends, capital expenditure follow specified payment timing
  • Monthly payment forecast:
    • January: $85,000
    • February: $114,000
    • March: $178,000
    • April: $152,000
    • May: $181,000
    • June: $235,000

Surplus/Deficit and Cash Balance

• Monthly Surplus/Deficit:

  • Calculated by subtracting payments from receipts
  • Example: January surplus of $7,000

• Cash Balance Forecast:

  • Starting balance in January: $15,000
  • Forecasted month-end balance taking surplus/deficit into account
  • Example: January ending balance of $22,000

Director's Concerns and Recommendations

• Sales Increase: Positive, but overdraft concerns due to limits
• Current Overdraft Limit: $50,000
• Projected Issues:
  • Overdraft limit exceeded from April onward
  • Significant deficits in May and June

Solutions and Strategies

1. Increase Overdraft Limit

   • Negotiate with bank for higher limit

2. Operational Adjustments:

   • Cancel or delay dividends
   • Delay capital expenditure
   • Adjust credit terms with customers and suppliers
   • Improve collections from sales

3. Cost Management:

   • Explore cost-cutting in wages and overheads
   • Delay and renegotiate payment terms for overheads

Conclusion

• Cash budgets require careful reading and planning
• Next lecture will focus on another technique, the "Bow Bow"