Cash Management
The next two pages contain forms to assist the management team in efficiently managing cash flows. Some obligations are realized on the first day of each period, such as: pay-back of any carried-over [beginning] emergency loans, equipment and storage sales and purchases, payables from the previous period, previous current liabilities due, pre-pay on the bank debt and any new investments made. A close study of the cash budgeting form will make clear other sources and uses of cash. Managing cash flow successfully will prevent emergency borrowing which is more expensive (20% per annum) than planned borrowing (10% per annum), recalling investments (7% per annum) or issuing new stock (10% per annum, when there are after tax profits.)
Table 31 Interest and Dividend Rates per Period
Planned borrowing from the bank
|
5.0%
|
Emergency borrowing from the bank
|
10.0%
|
Earnings on Investments
|
3.5%
|
Dividend policy
|
5.0%
|
BANK LOANS
On the balance sheet for each period, 5 percent of the total ordinary bank debt is listed as Mortgage Payable under CURRENT LIABILITIES. This amount is due to the bank on the first day of the next period. The bank will make emergency loans to your dealership if needed. Any Emergency Debt balance at the end of a period must be repaid on the first day of the next period.
INVESTMENTS
Your dealership may invest excess cash in liquid investment accounts bearing an annual return of 7 percent -- 3.5% per half-year. Investments may be recalled in whole or in part if needed elsewhere in the dealership. Investments made and called occur on the first day of each period. If your dealership needs cash, all investments are automatically called before emergency loans are taken out.
COMMON STOCK
The small group of owners has 250,000 shares of common stock, valued at $250,000, representing their original investment in the dealership. The dealership’s policy has been to pay a 5 percent dividend on that stock value each half-year in which positive NET INCOME is available to do so.
The owners have told you that they may be willing to increase their investment in the dealership if you recommend doing so. On the decision form, this is represented by decision #55: Issue Common Stock. Newly issued common stock funds are available on the first day of the period in which the stock is issued.
CASH BUDGET WORKSHEET
The Cash Budget is used to help estimate cash needs for upcoming periods. This will allow your management team to readjust purchases, pricing, borrowing, etc to prevent emergency borrowing. There are two critical times to balance cash sources with cash uses -- the first day of the half-year period and the last day of the half-year period. This worksheet should help do that.
FORECASTING CASH REQUIREMENTS
The Cash Budget Worksheet will help players assure that enough cash is available so that emergency loans do not have to be made. Remember, emergency loans are made at an annual interest rate of 20% while planned loans cost only 10% per annum.
The entries in the firts Cash Budget Worksheet, in the spreadsheet, represent the entries that would have been made by the previous management team when planning for and making decisions for the "LAST FALL" half-year period shown in this player's manual. In other words, the Cash Budget Worksheet was used to estimate cash needs and plan for adequate cash for the "LAST FALL" half-year period. Most of the data needed to do that was found on the Balance Sheet from the end of the previous period, "LAST SPRING" in this case, and from the player's decisions for the coming half-year period, "LAST FALL" in this case. In the following table the letters in the left hand column indicate the source of the data for each entry on the Cash Budget Worksheet. The letters stand for the following
Key to Cash Budget Worksheet
BS-CA
|
Balance Sheet -- Current Assets
|
BS-CL
|
Balance Sheet -- Current Liabilities
|
D
|
Decisions for next half-year period
|
WP times D
|
Wholesale Prices X Decision on Quantity Ordered
|
EST
|
Estimates for the next half-year period
|
CALC-BS-LL
|
Calculate Interest on Long-term Liability from Balance Sheet
|
EST-CALC-CL
|
Calculated Interest on Emergency Loan Carried over from First Day
|
P&L-EST
|
Estimate Income Tax for Next Period
|
P&L-EST
|
Estimate Dividends for the Next Period
|
Cash is needed on the first day of any half-year period for paying off any emergency loans, purchasing equipment or storage facilities, paying off any Accounts Payable, paying the Mortgage Payable, Pre-paying on the Mortgage and Making Investments. Cash is available on the first day of any half-year period from the Beginning Cash account, one-half of Beginning Accounts Receivable, any Equipment Sales, New Loans, New Issued Stock and Called Investments.
Consider the example that follows. From "LAST SPRINGS" Balance Sheet enter Beginning Cash of $64,540 one half of Accounts Receivable and any outstanding Emergency Loan. The First Day also requires "LAST FALLS" decision form to get the required data for equipment purchases, equipment sales and storage purchases. Look again at "LAST SPRINGS" balance sheet for beginning payables and beginning mortgage payable. Return to "LAST FALLS" decision form for new bank loan, pre-paid bank loan, new issued common stock, call investments, and make investment. Add these data in the "Source" and/or "Use" columns. Now subtract the "USE" total from the "SOURCE" total to get the First Day cash balance. The cash balance should be positive. If it is not, you should change decisions for the next period until it is positive so as to avoid an emergency loan. Ways to increase the amount of cash available on the first day of any period are to
o Reduce equipment or storage purchases
o Increase equipment sales
o Increase new bank loans
o Decrease pre-paying bank loans
o Increase issuing of common stock
o Call investments if any are available
Ways to use cash if it is felt that too much is languishing in the cash account on the first day of any period are to:
o Increase equipment or storage purchases
o Decrease equipment sales
o Decrease new bank loans
o Increase pre-paying bank loans
o Decrease issuing of common stock
o Make investments if any are available
Your decisions must also be tempered by considerations other than just the cash balance in the business. Managing cash well is important but only one aspect of the overall objective of optimizing the return on owners' equity over time.
Last Day cash balance requires the following data. Carry forward the ending first day cash balance from the "First Day" calculations. From "LAST SPRINGS" balance sheet enter one half of Accounts Receivable. All fertilizer and chemical products ordered for the next period are paid for on the last day of that period. To find the cash needed for product purchases, multiply the "Wholesale Price" for that period by the quantity ordered. The Wholesale Prices are from the Retail Price Guide for the next period. Then estimate the Cash Receipts, Other Income, Cash Operating Expenses and Ending Accounts Payable by looking back at the most recent similar half-year period Profit and Loss Statement and Balance Sheet. Using the same logic, estimate the Income Taxes and Dividends likely for the next period. Then subtract the "USE" total from the "SOURCE" total to get the Estimated Last Day cash balance.
The cash balance should be positive. If it is not, you should change decisions for the next period until it is positive so as to avoid an emergency loan. Ways to increase the amount of cash available on the last day of any period are to:
o Reduce equipment or storage purchases
o Increase equipment sales
o Increase new bank loans
o Decrease pre-paying bank loans
o Increase issuing of common stock
o Call investments if any are available
o Reduce Product Orders
o Change to Lower Numbered Credit Policy
Ways to use cash if it is felt that too much is languishing in the cash account on the last day of any period are to:
o Increase equipment or storage purchases
o Decrease equipment sales
o Decrease new bank loans
o Increase pre-paying bank loans
o Decrease issuing of common stock
o Make investments if any are available
o Increase Product Orders
o Change to Higher Numbered Credit Policy
Figure 3. CASH BUDGET WORKSHEET (example from end of “Last Spring”
forecasting cash needs for “Last Fall”)
Where to get the Data
|
ESTIMATE OF
FIRST DAY CASH
|
|
SOURCE |
USE |
|
|
|
|
|
BS-CA
|
Beginning Cash |
|
64,540 |
|
BS-CA
|
1/2 Beginning Accounts Rec |
|
295,198 |
|
BS-CL
|
Carry-over Emergency Loan |
|
|
0 |
D
|
Equip Purchases |
|
|
0 |
D
|
Equip Sales
|
|
0 |
|
D
|
Storage Purchases |
|
|
0 |
BS-CL
|
Beginning Payables |
|
|
99,284 |
D
|
New Loan |
|
0 |
|
D
|
Pre-Pay Loan |
|
|
0 |
BS-CL
|
Beginning Loan Due |
|
|
38,000 |
D
|
New Issue Stock |
|
0 |
|
D
|
Call Investments |
|
0 |
|
D
|
Make Investment |
|
|
0 |
|
Estimated First Day Cash Totals
|
|
359,738 |
137,284 |
|
Ending First Day Cash Balance
|
222,454 |
|
|
Equipment Purchases/Sales for FIRST DAY CASH NEEDS
Equip Sales/Purchases
|
Number
+ or -
|
Purchase
Price
|
SOURCE
(Sales)
|
USE
(Purchases)
|
Pickup |
0 |
|
|
|
Floater |
0 |
|
|
|
VRT |
0 |
|
|
|
Nurse |
0 |
|
|
|
Chem Sprayer |
0 |
|
|
|
NH3 Applic |
0 |
|
|
|
NH3 Nurse |
0 |
|
|
|
Dry Cart |
0 |
|
|
|
Sub-TOTAL
|
|
|
0
|
0
|
Chem Store |
0 |
|
|
|
Dry Store |
0 |
|
|
|
Liq Store |
0 |
|
|
|
Anhyd Store |
0 |
|
|
|
Sub-TOTAL
|
|
|
0
|
0
|
GRAND TOTALS
|
|
|
0
|
0
|
Figure 3.(Continued) CASH BUDGET WORKSHEET (example from end of “Last Spring” forecasting cash needs for “Last Fall”)
Where to get the Data
|
ESTIMATE OF
LAST DAY CASH
|
|
SOURCE |
USE |
|
Ending First Day Cash Balance |
|
222,454 |
|
BS-CA
|
1/2 Beginning Accounts Rec |
|
295,198 |
|
WP times D
|
PRODUCT PURCHASES |
|
|
1,136,765 |
EST
|
CASH Total Receipts |
|
1,372,362 |
|
EST
|
Other Income |
|
175 |
|
EST
|
Tot Oper Exp – Depreciation |
|
|
512,623 |
EST
|
Ending Payables |
|
76,894 |
|
CALC-BS
|
Long-term Loan Int Expense |
|
|
36,100 |
EST-CALC
|
Emergency Loan Int Expense
(for First Day Emerg. Loan)
|
|
|
|
P&L-EST
|
Tax |
|
|
0 |
P&L-EST
|
DIV |
|
|
0 |
|
Estimated Last Day Cash Totals
|
|
1,967,083 |
1,685,488 |
|
Ending Last Day Cash Balance
|
281,595 |
|
|
Product
Purchases for LAST DAY CASH NEEDS
Product Purchases
|
Number
Ordered
|
Wholesale
Price
|
TOTAL $
|
ST. GOODS
|
2600 |
$153 |
|
BULK BLENDS
|
XXXXX
|
XXXXX
|
XXXXX |
UREA
|
0 |
|
|
ANHYDROUS
|
1880 |
$237 |
|
28% LIQUID NITROGEN
|
0 |
|
|
LIME
|
2000 |
$55 |
|
N-SERVE (Acre)
|
6300 |
$4.40 |
|
CHEM Packaged
(Acre)
|
1000 |
$18.25 |
|
CHEM (Acre)
|
6300 |
$15.25 |
|
TOTAL
|
|
|
$1,095,405
|
NOTE:
“Late Orders” cost 10 percent more [wholesale price X 1.10]
“Late Orders” in the LAST FALL Period add an additional$41,360 to
Product Purchases.
See the “Sales and Inventory
Report in Table 21A.
|
$41,360 |
TOTAL including Late Order expenses.
|
$
1,136,765 |
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Cash Budget
