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CHAPTER 3 The Cash Budget Explain the purpose of the cash budget and how it differs from an income statement. Calculate a firm’s expected total cash collections and disbursements for a particular month. Calculate a firm’s expected ending cash balance and short-term borrowing needs. | 3 The Cash Budget After studying this chapter you should be able to 1. Explain the purpose of the cash budget and how it differs from an income statement. 2. Calculate a firm s expected total cash collections and disbursements for a particular month. 3. Calculate a firm s expected ending cash balance and short-term borrowing needs. 4. Demonstrate how Excel can be used to determine the optimal timing of major cash expenditures. 5. Use the Scenario Manager to evaluate different assumptions in a model. 6. Use the various tools that Excel provides to find and fix errors in formulas. Of all the topics covered in this book perhaps no other task benefits so much from the use of spreadsheets as the cash budget. As we ll see the cash budget can be a complex document with many interrelated entries. Manually updating a cash budget especially for a large firm is not a chore for which one volunteers. However once the initial cash budget is set up in a spreadsheet updating and playing what if becomes very easy. A cash budget is simply a listing of the firm s anticipated cash inflows and outflows over a specified period. Unlike a pro forma income statement discussed in Chapter 67 68 The Cash Budget 5 the cash budget includes only actual cash flows. For example depreciation expense does not appear on the cash budget but principal payments on debt obligations which are not on the income statement do. Because of its emphasis on cash income and expenditures the cash budget is particularly useful for planning short-term borrowing and the timing of expenditures. As with all budgets another important benefit of the cash budget comes from reconciling actual cash flows with those from the forecast. We ll see that a cash budget is composed of three parts 1. The worksheet area 2. A listing of each of the cash inflows collections and outflows disbursements 3. Calculation of the ending cash balance and borrowing needs. Throughout the chapter we will create a complete cash budget with these .
