this is a lecture from open tuition to benefit from the lecture you should download the free lecture notes from open tuition com alright this is the second lecture on the management of cash and when I said at the end of the previous lecture as far as calculations are concerned there are three things to be aware of the first of week should by far the most important in practice is cash budgets you should be aware of budgeting in general from earlier exams but so important is a cash budget budgeting usually monthly how much cash we think will receive how much cash will pay and therefore what we expect will happen to the bank balance the cash balance so that we can identify months when perhaps we're going to have surplus cash then we could plan ahead what we're going to do with it even more importantly we can identify months when we're likely to be short of cash and then we can decide how are we going to cope with it you know think back to the last lecture if we know we're going to be short of cash in three months time you know can we delay capital expenditure can shall we delay dividends and so on so terribly important and on the first well on the first page but at the section five you've got to grow former cash bunches that does the same we normally will do it monthly the next six months the next twelve months or whatever where we list what receipts we expect what payments we expect and then month by month what cash surplus or deficit we expect and we can use that to forecast what the cash balance will be at the end of each month and to show you have a look at on the next page in example one you're presented with the following forecasted cash flow data the organization for the period November x12 - next - woman it's been extracted from functional flow forecasted already been prepared so we'll have been doing budgets budgeted profit statements and so on and the information we got from that well we've budgeted in what the sales will be from November x1 right the way through to June x2 we've budgeted what the purchases will be the wage is the overheads the dividends capital expenditure so we've got all that information from our profit budgets now we're also told sales are 40 percent cash 60 percent credit themselves I'm ready to pay two months after the month of sale purchases have paid the month following purchase see wages 75% of our wages are paid in the current month and 25% in the following month owners are paid in the month after their incurred dividends have paid three months after their have declared after they're announced coming expenditure we pay two months after it's incurred for taking two months credit and the opening cash balance is fifteen thousand the multiple directories please would be above figures because this show sales would have increased by more than a hundred percent look at the sales figures November eighty thousand the following June with budgeting on 190 and the back sorry back to my director in order to achieve this he's arranged a bank overdraft with a ceiling of limit of fifty thousand dollars to accommodate to cover the increased inventory levels of wage bill that will help for overtime worked and we are asked to prepare a cash flow forecast a cash budget for the six month period January to June and they will comment on what results we get so let's set it up standard me : milli we're asked to do January to June so January February March April May June now let's first of all go through what receipts we expect well the only receipts mentioned are going to be the receipts from sales and we know how much sure we expect to sell each month but a note he tells us that the sales 40% of them are cash sales 60% of them though are on credit and credit sales are paid two months after the month we sell them so customers are taking two months credit whatever we sell in January on credit we'll get the cost of two months later if everything March so let's do it first of all what are the receipts will cash sales that's easy enough cash sales you'll get them the money in the same month and same January the sales are earning ten thousand forty percent of them Akash and so 40% of hundred and ten forty four thousand the rest of January sales are on credit so the other 60% of 110 January sales 110 thousand sixty percent sixty six thousand got credit well we sell them in January but we get the cash two months later we'll get the cash in March and similarly February sales one hundred and thirty forty percent our cash so 40 percent of Africa thirty fifty two thousand selling February get the cash in February but the other 60% will be two months later one hundred and thirty sixty percent seventy eight thousand sold in February to us later we get the cash in March Marty sales Anika forty forty percent in cash which is fifty six thousand the other 60 percent which is how much a little forty times sixty percent eighty four thousand two months later in May April sales 750 so forty percent is in cash in the same month they are the sixty percent which is what ninety thousand two months later in June May sales hundred sixty forty percent sixty four thousand in cash will be received in May the sales on credit we are only doing the cash flow forecast up to June and so that Mays credit sales the cash were coming to do you look July for our purposes but we're not going up to do i but similarly June sales under nineteen forty percent in cash in June which is 72 how as you may have realized and been waiting for in January and February will be receiving cash for credit sales from the area months November in December that's why the informations given you see in November we have sales of eighty thousand some of the forty percent will be received in cash in November but we're not doing last November's cash flow forecast but sixty percent of the members sales which is forty eight thousand received two months later December January saying January will get forty eight thousand from the previous November's sales and similarly and finally the sales in December forty percent were cashing and wonder where to have the money in December but the other sixty percent sixty thousand the cash two months later in January which is February which is in the period we're looking at so there are the forecast cash receipts that the only receipts so the total receipts were expecting in January 92 thousand in February hundred and twelve in March 120 to April 138 May hundred and forty-eight and finally June 162 so those are the cash receipts report casting now let's look at the cash payments a lesson in turn in the top table we told what the purchases we expect each month but if you look at B Nobi purchases have paid the month following purchase so we're taking one month's credit so November's purchases will be paid for in December but we between generates June December's purchases you know the numbers purchases paid what my plate that will be in January so we'll pay 60,000 in January January's purchases of 8t will be paid for in February and so on February's 90 will be paid in March March is hundred and turnip played in April hundred and thirty following month may and may thundering 40 that we paid in queue June's purchases won't be paid until July and we are only doing the forecast for these six months what about wages we know what new ages Billy's each month but note C says 75% are paid in the current month the other 25% have paid one month later well I won't waste time doing separate workings although it is two lines 75% is paid in the current month so January but only 16,000 75% of 16 is 12,000 12,000 therefore we paid in January and the other 25% 4,000 but we paid the following month February February's wages of 20 75% of 15,000 will be paid in February the other 25% or 5,000 will be played in March March his wages 24 where are we yes 24,000 75% is 18 paid in March 25 percent or 6,000 in the following month April said 95% of 28 is 21,000 they did in April the other 25% 7,000 in the following month which is May May 75% is 24,000 painting May 8,000 is the other 25% paid in June and June the bill is 36,000 75 percent is 27,000 the other 9,000 that we paid in July we're not doing July finally though of course I need to go back to the beginning because a bit the same ideas we had with them sales receipts earlier the wages bill for December x1 was 12,000 75% of that will have been paid in December and we're not doing December statement but the other 25% of December's wages have been paid for in January so December's wages were twelve twenty five percent 3,000 would be paid one month later in January now what else ovince we know the expense each month but when are they paid well DS s events have made the month after their incurred so in January we'll be paying December's overheads which were 10,000 February we paying January's over had such a 15 in March we pay February's which are again 15 April we pay marches which again a 15 May we pay April's expenses which were 20 and finally in June we paying May's expenses which again are 20 that's a nice easy one and dividends a 20,000 and 40,000 but look at note e it made three months after they declared or after their announced so the dividend that was announced last december of twenty thousand won't be paid until three months late which is when January February March so in March we'll be paying that dividend of twenty thousand there's another dividend of forty thousand in June but it is declared in June it's not going to be paid until July August until September well we're only doing the forecast up till June finally capital expenditure new machines etc 30,000 40,000 but note F we pay two months after its income so we're taking two months credit so if you may have covered let's mention of thirty thousand in January well actually pay the cash to must enter February March which is March and getting lost in March and finally forty thousand in April that we paid two months later May - we'll pay forty thousand the cash will be paid in June so we've got all the expenses there the payments now rather so what's the total payment each month in January seventy to eighty five thousand in February thirty four hundred and fourteen thousand in March but is not calculated to be safe nineteen plus 18 plus five plus fifteen is 20 plus 30 178,000 in April hundred and ten thousand thirty one hundred and fifty two thousand may one eighty one thousand and finally two to thirty finally thousand so we now know our budgeted receipts cash receipts cash payments each month what's the net surplus or deficit in January received 92 pay 85 saw a surplus of 7,000 in February receive hundred 1214 so a deficit of 2,000 March 122 payout 178 a deficit of ooh 56,000 I don't really much April 152 out hundred and 38 in a deficit of 14,000 May 191 out until 48 in deficit 33,000 and finally in June to 35 out hundred and sixty-two in a deficit of 73 we need know to forecast what the bank balance will be the cash grants will be each month it does tell us in note G that the opening balance is 15 so the balance brought forward 15 and therefore surely at the end of January where we are 15 is a surplus of seven and so the balance carried forward at the end of January for the 22 come to February but of course February starts with 22,000 now there's a deficit of two so the closing balance is 20 march level starts of twenty was a deficit of fifty six so we end up with a negative balance of 36 came from we start with an order after 36 deficit of 14 so we am with a an overdraft of 50 may we start with 50 we end up with 83 and finally June we start with an overdraft of 83 a deficit of 73 so we end with an overdraft of 156 thousand so there we are there's our cash budget is taking a long time for me to speak it's actually been quick to do and you're on my channel for six months however that was the the numbers bit part Bevo comment on your results in the light of the mansion directors comments and offer advice place comment alright he's pleased that sales have increased fine obviously that it's only is good and we know how to do profit statements but I'm sure well I'm not sure actually but you know hopefully profits will increase however these other comments he realized we were going to go overdrawn so he's arranged an overdraft but there's a limit on it of 50,000 and of course we've got a problem in that we do go overdrawn we hit the limit though which are pretty much in April so up to the end of April hopefully we're okay we're allowed an overdraft of 50,000 but we have a huge problem of course in May and June we go way over the limit and so there's the problem and what are we going to do about it surely there are various things to consider one of course would be to see if we can arrange with the bank a bigger limit you know we need a limit certainly up to two hundred and fifty six thousand so see if the bank will allow it if they won't or alternatively what can we do about it it's all relates to the chat I had in the previous lecture that certainly the dividends we could cancel the dividend and if we cancel the dividend of 20 that would mean we Omega get a size one 36,000 or draft we could consider delaying the capital expenditure for both of them because that would save us another 70,000 then we're getting much closer to down to the limit the top with your line coming like spending to of course is the extra sales or perhaps because of buying new machines if we don't buy the new machines we save about 70,000 but maybe we don't get the extra sales as a result and lose cash that way one else we can try and get our sales cream sales to pay earlier there are two months credit if we can pull it down to one month's credit we get cash in sooner and that would help the cash flows maybe offer them a little discount get them to pay we could delay paying our suppliers we only take one month credit from suppliers Nobby but we're allowing two months great to customers so you know if if our customers are taking too much credit why don't we take two months credit from our suppliers and delaying the payments by an extra month that would help the cash balance bring the overdraft down wages and overheads I think you're unlikely to do well it's time for unlikely to agree to you - laying paying wages so not much we can do there except of course try and cut expenses wages and over notes have I ever had to pay a month after being cured I think you're less likely able to delay payment of overheads you know it's things like electricity dangerous if you delay too long they turn off the electricity but certainly see if we can do a payment because again if we can delay time again it would bring down the overdraft but unless we do something the company's got a huge problem because again wants to get the old April they completely run out of cash and they can't borrow any more you know unless we'll get the overdraft increased anyway there we are that's cash budgets it's just reading carefully in speed I don't think it's both medically difficult I leave out there in the next lecture now look at the next technique which is something called the bow bow