Cash Budgeting (Short-Term Cash Planning)

How is short-term debt obtained?

*Banks: Businesses large and small rely on banks for access to short-term funds. *Forms of bank financing: *Lines-of-credit *Asset-based financing *Factoring of receivables *Inventory Financing *Larger businesses may use commercial paper. International trade may use banker's acceptances.

How do we forecast cash collections?

*Historical data show patterns of customer payments that may be expected to repeat. *Seasonality *Day-of-the-week or day-of-the-month payment patterns may exist. *Accounts receivable aging: How long do customers typically take to pay on account?

How do we forecast disbursement?

*Payment for materials follow inventory control and account payment terms. *Purchases are made in advance of projected sales *Operating expenses follow established patterns. *Some payments may come at regular, but infrequent intervals. *Short-Term debt service payments are a function of the financial plan.

What are the elements of a typical cash budget?

*Projecting collections and disbursements from operating activities by period (day, week, etc.) *Projecting need for short-term debt funds to cover operating deficits. *Planning for payment of interest and principal on short-term debt as operating surplus permits. *Maintaining minimum cash balances to reduce risk.

Why do firms use short-term debt?

*Relative to permanent capital, short-term debt has certain advantages: *Flexibility: Use short-term debt when you need it, pay it off when you don't. *Cost: Short-term interest rates are usually lower than long-term interest rates. *Short-term debt is appropriate for short-term asset needs, but very risky to use for permanent asset financing.

Short-Term Financial Planning Process

1. Select appropriate planning period (Daily, weekly, monthly or quarterly cycles) (Credit reserves provide liquidity at lower cost than cash reserves). 5. Investing in Liquid Assets (Generate returns while maintaining liquidity).

Long-Term Financial Planning

Planning for growth Future asset needs require preparation to obtain long-term funding (i.e., bonds and equity)

Short-Term Financial Planning

Planning for liquidity Efficient cash balances will be adequate to maintain liquidity, while avoiding the opportunity cost of excess cash.