How does cash flow into and out of my company throughout
Are we able to meet our current financial obligations
and goals, and can we accommodate future changes without exceeding
With a reasonable degree of accuracy, what will our
funds balance be at the end of this month? Mid-way through the fiscal
year? At the end of the year?
What is our "cash plan" for the coming month,
quarter or year?
You will need to gather the following financial
statements: balance sheets and income statements for the current
period as well as the most recent 2-3 years, as well as sales forecasts
for the current period and the coming year.
In regard to maintaining a cash reserve, ask
yourself the following questions:
How much cash is necessary for meeting short-term obligations in
case of a cash-flow emergency?
How much money do we currently keep on hand?
If we are holding too much, how could the excess be put to better
use? If we are not holding enough, what is our plan for making up
of a Cash Budget
following is a sample 90-day cash budget for Zoya Skincare, a fictitious
beauty supply business:
| Zoya Skincare
for 90 Days
|Beginning cash balance
| Estimated collections
on accounts receivable
| Estimated cash sales
| Estimated payments on
| Estimated cash expenses
| Contractual payments on
| Quarterly dividend
|Estimated ending cash balance
Analysis of Sample Cash Budget
analysis of Zoya's financial statements shows that the accounts
receivable remain at about $500,000 throughout the year; that is,
there is no seasonal fluctuation in sales. The accounts receivable
turns over six times a year, or once every 60 days. The inventory
throughout the year remains at about $800,000 and turns over every
90 days. The accounts payable remains at about $400,000 and turns
over eight times a year, about once every 45 days. With an accounts
receivable collection period of 60 days and an average balance outstanding
of $500,000, it appears that $750,000 is the amount that should
be collected on the receivables in 90 days. Cash sales should amount
to about $250,000 if the inventory of $800,000 valued at cost turns
over once in 90 days, and if the average markup is about $200,000.
Therefore, if an inventory of $1,000,000 at retail turns over once
every 90 days, and $750,000 flows through accounts receivable, then
approximately $250,000 must be sold on a cash basis. Cash payments
for expenses are estimated to be $150,000 in the next 90 days. This
figure can be roughly checked by referring to the expenses on Zoya's
income statement. A rough measure of the cash expenses can usually
be obtained by using the operating expenses less any non-cash expenses,
such as depreciation. For example, if there is no seasonal factor,
the total amount divided by four should be an approximate check
on the amount budgeted for the next 90 days.
out and use the table below to create a cash budget for your company.