The cash budget is considered the primary forecasting tool when firms try to est

Question

The cash budget is considered the primary forecasting tool when firms try to estimate their cash flows and figure out if they are likely to need additional cash flows or to generate surplus cash Consider the case of Mooney Equipment: Mooney Equipment is putting together its cash budget for the following year and has forecasted expected cash collections over the next five quarters (one year plus the first quarter of the next year). The cash collection estimates are based on sales projections and expected collection of receivables. The sales and cash collection estimates are shown in the following table (in millions of dollars): 2 3 4 5 Sales $1,650 $1,950 $2,000 $1,800 $2,050 Total cash collections $1,650 $1,700 $1,750 $1,750 You also have the following information about Mooney Equipment: . In any given period, Mooney's purchases from suppliers generally account for 76% of the expected sales in the next period, and wages, supplies, and taxes are expected to be 15% of next period's sales . In the third quarter, Mooney expects to expand one of its plants, which will require an additional $1,076 million investment . Every quarter, Mooney pays $45 million in interest and dividend payments to long-term debt and equity investors Mooney prefers to keep a minimum target cash balance of at least $15 million at all times Using the preceding information, answer the following questions: . What is the net cash inflow that Mooney expects in the second quarter (Q2)? . If Mooney is beginning this year with a cash balance of $38 million and expects to maintain a minimum target cash balance of at least $15 million, what will be its likely cash balance at the end of the year (after Q4)? . What is the maximum investable funds that the firm expects to have in the next year? . What is the largest cash deficit that the firm expects to suffer in the next year? True or False: Based on the surplus or deficit derived from the cash budget, managers negotiate for short-term loans with banks. They often add a cushion to the difference between forecasted ending cash balance and the minimum target cash balance False

Explanation / Answer

Q1 Q2 Q3 Q4 Q5 Sales $1650 $1950 $2000 $1800 $2050 Total cash collections $1650 $1700 $1750 $1750 1) What is the net cash inflow that moneey expects in the sector quarter (Q2) In $ Total Cash collections in Q2 1700 Less: Payment for purchases 76% of Q3 sales $2000 1520 (2000*76%) Less: Wages, supplies, and taxes are 15% of Q3 sales $2000 (2000*15%) 300 Less: Interest payment 45 Total net cash inflow -165 The cash inflow would be negative $ 165 for Q2 2) If mooney is beginning this year with a cash balance of $ 38 million and expects to maintain a minimum target cash balance of at least $ 15 million, what will be its likely cash balance at the end of the year Amount in $ Q1 Q2 Q3 Q4 Total Cash collections 1650 1700 1750 1750 Less: Payment for purchases 76% of next quarter sales 1482 1520 1368 1558 Less: Wages, supplies, and taxes are 15% of next quarter sales 292.5 300 270 307.5 Less: Interest payment 45 45 45 45 Investments 1076 Add: Cash at the beginning of the year 0 -169.5 -334.5 -1343.5 Cash at the end of the year -169.5 -334.5 -1343.5 -1,504.00 The cash balance at the end of the year (Q4) would be $ 1504 assuming there is no opening balance at start of the year 3) The company has deficit cash balance, hence the maximum investable funds that the firm will have is Zero 4) The largest cash deficit would be $ 1504 5) True, because based on the cash budget the company can borrow funds from the banks. The company adds cushion because sometimes the credit period is increase and this leads to delay in receipt of payment from debtors

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