CASE 28

CASH BUDGETING

Getting Our Act Together

1. Even though sales have been increasing, why is Integrated

Electronics in such a cash flow crunch?

Integrated Electronics’ cash inflows and outflows are not well balanced. Its sales are
seasonal as well,with the highest sales occurring in the last quarter of the year. The firm’s
payments for purchases are made in 30 days while the receipts (especially from
wholesale orders) take between 30-60 days to come in, on average. The firm does not
have a minimum cash balance policy and therefore in lean cash flow months its cash
balance declines considerably.

2. What does the firm need to do as soon as possible?

The firm needs to prepare a detailed cash budget showing the monthly cash
collections and disbursements for resulting surpluses and shortfalls. This will help it to
determine how much of a line of credit it needs to set up so as to avoid having to be faced
with overdraft notices from its bank.

3. Prepare the collections worksheet. Which month has the greatest amount of
cash inflows?(Excel)

The greatest amount of cash inflows occurs in December(796750).

4. Prepare the disbursements worksheet. Which months seem to be hit by the

highest amount of cash outflows? Why?Can this trend be changed?(Excel)

June, September, October, November, and December are hit by relatively high cash
outflows. This is because of higher payments for purchases resulting from higher
 forecasted sales during the last quarter of the year. Changing the ordering and
payment schedules during the year can change this trend.

5. How should the depreciation expense be treated in the cash budget?

Depreciation is not a cash outflow and should be ignored in the cash budget.

6. Which months seem to be particularly vulnerable to cash deficits? Which

months have the greatest surpluses?

January, March, June, September, December seem to be particularly vulnerable to

cash deficits. February, July, October, November have the greatest surpluses.

7. If the cash balance outstanding is -$52,000, help Sean develop a cash budget
for Integrated Electronics for the next twelve months. How can Jerry use the cash
budget to minimize cash shortages and plan for the future?

(Excel)

The budget shows that June,September, October, December are going to

particularly vulnerable months for the firm as far as cash shortages are concerned. The
maximum shortfall seems to be around $43,500. Jerry can use the cash budget to
determine how much of the surplus cash should be invested and how much should be
kept as a minimum reserve to prevent shortfalls.

8. Given that the monthly sales figures have been fluctuating so much what
should Sean do while preparing the cash budget? Can he take the sales figures
provided by the finance department at face value? If so why? If not why? What
other options does he have?

Sean should prepare various versions of the cash budget using alternative sales
scenarios.For example, Best, Base, and Worst case scenarios can be analyzed by varying
 the salesfigures. The finance department’s sales figures should not be taken at face
value. Theyare probably too conservative. As stated earlier, alternative scenario analyses
should be performed.

9. How can a minimum cash balance be built in? How much of a minimum
cash balance seems warranted? What can the company do with the excess cash that
is generated in some months?

By taking a look at the forecasted cash flows and providing enough of a reserve to
cover the largest forecasted shortfall one can build in a minimum cash balance.The
largest shortfall seems to be $43,500 (in September). So a minimum cash balance
of about $50,000 seems to be warranted. If this cash balance is allocated at the start
of the budget, it will help minimize the risk of future cash shortfalls. Excess cash can be
invested in money market securities.

10. Rework the budget by using your suggested minimum cash balance.

(Excel)