© Pearson Education 2013 3-1

Principles of Managerial Finance

Arab World Edition
Gitman, Zutter, Elali, Al Roubaie

Chapter 3: Cash Flow and

Financial Planning

Lecturer: [Insert your name here]

© Pearson Education 2013 3-2

The Financial Planning Process

• Financial planning involves guiding, coordinating, and

controlling the firm’s actions to achieve its objectives.
• Two key aspects of financial planning are cash planning
and profit planning.
• Cash planning involves the preparation of the firm’s cash
budget.
• Profit planning involves the preparation of both cash
budgets and pro forma financial statements.

© Pearson Education 2013 3-3

 The Financial Planning Process:
Long-Term (Strategic) Financial Plans

Long-term strategic financial plans lay out a company’s

planned financial actions and the anticipated impact of those
actions over periods ranging from 2 to 10 years.
Long-term financial plans consider a number of financial
activities including:
• Proposed fixed asset investments
• Research and development activities
• Marketing and product development
• Capital structure
• Sources of financing
These plans are generally supported by a series of annual
budgets and profit plans.

© Pearson Education 2013 3-4

 The Financial Planning Process:
Short-Term (Operating) Financial Plans

• Short-term (operating) financial plans specify short-term financial actions

and the anticipated impact of those actions and typically cover a one to two year
operating period.
• Key inputs include the sales forecast and other operating and financial data.
• Key outputs include operating budgets, the cash budget.

© Pearson Education 2013 3-5

Cash Planning: Cash Budgets

• The cash budget or cash forecast is a statement of the

firm’s planned inflows and outflows of cash.
• It is used to estimate short-term cash requirements with
particular attention to anticipated cash surpluses and
shortfalls.
• Surpluses must be invested and deficits must be funded.
• The cash budget is a useful tool for determining the timing
of cash inflows and outflows during a given period.
• Typically, cash budgets are developed covering a 1-year
time period.

© Pearson Education 2013 3-6

 Cash Planning: Cash Budgets
The Sales Forecast

• A sales forecast is a prediction of the sales activity during

a given period, based on external and/or internal data.
• The sales forecast is then used as a basis for estimating the
monthly cash flows that will result from projected sales and
from outlays related to production, inventory, and sales.
• The sales forecast may be based on an analysis of external
data, internal data, or a combination of the two.
– An external forecast is a sales forecast based on the
relationships observed between the firm’s sales and
certain key external economic indicators.
– An internal forecast is a sales forecast based on a
buildup, or consensus, of sales forecasts through the
firm’s own sales channels.

© Pearson Education 2013 3-7

 Cash Planning: Cash Budgets
Preparing the Cash Budget

Table 3.5
The General Format
of the Cash Budget

© Pearson Education 2013 3-8

Cash Planning: Cash Budgets
An Example: Gulf Industries

• Gulf Industries all numbers are in thousand , a defense

contractor, is developing a cash budget for October,
November, and December.
• Gulf’s sales in August and September were US$100 and
US$200 respectively.
• Sales of US$400, US$300 and US$200 have been forecast
for October, November, and December.
• Historically, 20 percent of the firm’s sales have been for
cash, 50 percent have been collected after 1 month, and
the remaining 30 percent after 2 months.
• In December, Gulf will receive a US$30 dividend from stock
in a subsidiary.
(continued)
© Pearson Education 2013 3-9
 Cash Planning: Cash Budgets
An Example: Gulf Industries (cont’d)

• Gulf Industries has also gathered the relevant information for the development of
a cash disbursement schedule.
• Purchases will represent 70 percent of sales—10 percent will be paid immediately
in cash, 70 percent is paid the month following the purchase, and the remaining
20 percent is paid two months following the purchase.
• The firm will also expend cash on rent us$ 5 every month, wages and salaries are
48 and 38 and 28 for October and November and December respectively, taxes
will be us$ 25 will be paid in December , capital assets purchases us$ 130 in
November , interest payment us$ 10 in December, dividends payment us$ 20 in
october, and a portion of the principal on its loans us$ 20 in december.
(continued)

© Pearson Education 2013 3-10

 Cash Planning: Cash Budgets
An Example: Gulf Industries (cont’d)

• At the end of September, Gulf’s cash balance was US$50.

• Gulf also wishes to maintain a minimum cash balance of US$25.
• Requirment: prepare cash budget of the company for the October and November
and December.

© Pearson Education 2013 3-11

 Cash Planning: Cash Budgets
An Example: Gulf Industries (cont’d)

Based on this information, we are able to develop the following

schedule of cash receipts for Gulf Industries.

© Pearson Education 2013 3-12

Cash Planning: Cash Budgets
An Example: Gulf Industries (cont’d)
 Cash Planning: Cash Budgets
An Example: Gulf Industries (cont’d)

© Pearson Education 2013 3-14