Fin420 - Cash Budget PDF

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PUNCAK ALAM CAMPUSFACULTY OF BUSINESS MANAGEMENTFINFINANCIAL MANAGEMENTGROUP ASSIGNMENT: CASH BUDGETDATE OF SUBMISSION: 30TH JUNE 2020ACKNOWLEDGEMENTThis group assignment that was assigned to us gave us a tremendous impact towards ourselves. The impact was very beneficial for us in terms of enhancin...

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PUNCAK ALAM CAMPUS FACULTY OF BUSINESS MANAGEMENT

FIN420 FINANCIAL MANAGEMENT

GROUP ASSIGNMENT: CASH BUDGET

DATE OF SUBMISSION: 30TH JUNE 2020

ACKNOWLEDGEMENT This group assignment that was assigned to us gave us a tremendous impact towards ourselves. The impact was very beneficial for us in terms of enhancing our knowledge in the Financial Management FIN420 subject, specifically on the cash budget topic, as well as we learnt on how to work with each other better and adapt with the current situation in order to accomplish this group assignment. Therefore, we would like to express our gratitude to our lecturer, for assigning this group assignment to us, for guiding, for giving remarkable comments and constructive feedback, and also for teaching us with patience and passion throughout the whole semester. We pray that may Allah S.W.T grant her happiness, good health and success throughout her life. We would also like to express our appreciation to all those who have directly and indirectly guided us in accomplishing this group assignment. Many people, especially our classmates and amongst our team members, have made valuable contributions which includes sharing ideas and giving suggestions to this work which inspired us to improve our assignment. We thank all the people for their help, both directly and indirectly, in completing our group assignment. Last but not least, our deepest gratitude goes to our beloved parents for their endless love, prayers and encouragement. To those who have indirectly contributed in this group assignment, your kindness means a lot to all of us. Thank you.

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TABLE OF CONTENT

NO

CONTENTS

PAGES

1.0

BACKGROUND OF STUDY

4

2.0

PURPOSE OF STUDY

6

3.0

CASH BUDGET QUESTION

8

4.0

RESULT

14

5.0

CONCLUSION

15

6.0

RECOMMENDATION

17

6.0

RECOMMENDATION

18

1.0 BACKGROUND OF STUDY Based on the article we found, the word ‘Budget’ is derived from French word “Bougette” representing leather pouch into which funds are appropriated to meet the 3

anticipated expenses. The word “budget” therefore refers to the monetary or quantitative expression of business plans and policies to be pursued in future. It means that a budget reflects the financial or quantitative outline of what is to be done in future (Mishra, 2018). Furthermore, based on the article, cash budget is concerned with liquidity. It shows the requirements of cash in respect of various functional budgets as well as anticipated cash receipts (Mishra, 2018).

Cash budgets are commonly used to estimate whether a company has a sufficient amount of cash over a specific period of time to sustain its operations. It can also be used to determine whether too much of a company’s cash is being spent productively and vice versa. In simpler words, cash budgets determine the estimation of a company’s cash position in the future. A cash budget is very crucial, especially for infant or smaller companies because it allows firms to establish the amount of credit that it can extend to customers without having problems with liquidity. A cash budget helps to prevent a shortage of cash during periods in which a company faces a high number of expenses.

Moving on to the elements of cash budgeting. There are four general elements in the cash budget. The cash budget generally consists of four main sections which are receipts section, which is the beginning cash balance, cash collections from customers, and other receipts. Secondly, the disbursement section consisted of all cash payments made by purpose. Next, cash surplus or deficit section providing the difference between cash receipts and cash payments and lastly, the financing section showing a detailed account of the borrowings and repayments expected during the period.

4

Next, what is sales forecasting? From an article we found, any forecast can be defined as an indicator of what is most likely to happen in a specified time in a particular field. Accurate sales forecasting is essential for a business to enable it to produce the required quantity at the right time. Sales forecasting can be defined as the process of estimating future sales. Accurate sales forecasts ensure companies to make wise business decisions and estimate short-term and long-term performance. Sales forecasting helps firms on how they should manage its workforce, cash flow, and resources. In addition to helping a company allocate its internal resources efficiently, predictive sales data is important for businesses when looking to acquire investment capital. There are some non-cash expenses that are not contained in cash budgets because they do not entail a cash outlay, for example, bad debts and depreciation.

To conclude, by creating a cash budget, a company generally creates a summary of the cash inflows and outflows including revenues collected, operating expenditures, sale and purchase of assets, and settlement of debt. It is easier to track when more cash resources are needed, as well as when there will be an excess of cash.

5

2.0 PURPOSE OF STUDY Main purpose of study is to know well about cash budget and the importance cash budget towards all company. Generally, the cash budget is management ‘s approximation of cash on hand at the beginning of a budget period and the estimated cash inflows and outflows. The cash inflows may include those that result from cash sales, the sales of assets, the collection of accounts receivable or borrowing cash. The cash outflows may include disbursements for material purchases, debt repayment, asset acquisition, taxes, manufacturing costs and dividends. Furthermore, the cash budget highlights a company’s probable income or deficit for a period, the latter of which the company must address by increasing sales or decreasing expenditures. There are some importance of cash budget lies in its ability to identify a company’s future financing needs, highlight the need for corrective actions and evaluate a company’s performance.

One of the importance of cash budget is that company can anticipate when a cash deficit might exist and the extent of that shortfall. The budget in effect, shows when borrowing might need to make up a difference between the budgeted and real values. Short term financing can be required to buy inventory, advertise goods, or pay monthly expenses. By predicting cash requirements, a company can also evaluate future business opportunities in part based on opportunity’s probable financing needs and costs. For instance, financing costs will influence the profitability of a merger and product development. This process allows a company to select only those organizational goals that are financially feasible.

Secondly, a cash budget is a way to determine if a company has the cash necessary to meet upcoming obligations and to trigger corrective actions if a company experiences cash budget problems. As an example, a company experiencing cash budget problems may need to borrow money in the short term for emergency equipment repairs or the payment of taxes. The company may also need to borrow money in the long term for the introduction of new product to the market or the replacement of equipment. Others, the company might need respond to a sharp decline in market sales by adjusting spending more favorable terms with lenders.

6

7

Last but not least, a cash budget is used to illustrate a company’s financial position to internal and external stakeholders including investors, suppliers and company leadership. For example , rising cash flow may reflect strong demand for the company 's goods and business expansion opportunities, which are positive signals to current and prospective investors. Conversely, if business expenditures are substantially higher than the cash inflow of the business, the investment risk is high and may discourage further investment in the company Declining cash flow may also make it more difficult for a company to obtain additional credit or pay its existing debt, which might force the company into bankruptcy.

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3.0 CASH BUDGET a)

Based on the analysis of the past sales and collection records, the company’s cash

collections from sales are as follows: ● 25% of the sales are on a cash basis ● 50% is collected a year after the sale ● 25% is collected two years after the sale

Year

2019

2020

2021

2022

2023

Sales

10200

13800

24000

18000

15000

Cash Sales (25%)

10200 x 0.25

13800 x 0.25

24000 x 0.25

18000 x 0.25

15000 x 0.25

= RM 2550

= RM 3450

= RM 6000

= RM 4500

= RM 3750

10200 x 0.75

13800 x 0.75

24000 x 0.75

18000 x 0.75

15000 x 0.75

= RM 7650

= RM 10350

= RM 18000

= RM 13500

= RM 11250

9876 x 0.5

10200 x 0.5

13800 x 0.5

24000 x 0.5

15000 x 0.5

= RM 4938

= RM 5100

= RM 6900

= RM 12000

= RM 9000

9876 x 0.25

10200 x 0.25

13800 x 0.25

24000 x 0.25

= RM 2469

= RM 2550

= RM 3450

= RM 6000

Credit Sales (75%)

1 Year After Sales (50%)

2 Years After Sales (25%)

9

b)

Besides the cash collection from sales, the company expects two other cash

collections: RM300, 000 prepaid lease payment in the year 2023 and RM900, 000 collection of prepaid fire insurance premium payment in 2020.

Year

2018

2019

2020

2021

2022

2023

0

0

0

0

0

300

0

900

0

0

0

0

Prepaid Lease

Prepaid Fire Insurance

c)

The production in 2019 is based on the sales forecast for 2020, and so forth.

Therefore, the production expenses will include the cost of materials which averages about 35% of sales and are purchased in the year of their use in the production process, but total payments are made a year later.

Year

2019

2020

2021

2022

2023

1 Year Before

13800 x 0.35

24000 x 0.35

18000 x

15000 x 0.35

9000 x 0.25

=RM 4830

=RM 8400

=RM 5250

=RM 3150

RM 6300

RM 5250

0.35

Sales (35%)

=RM 6300

Credit Payment After 1 Year

10

RM 3570

RM 4830

RM 8400

d)

Direct labor is estimated at 25% of sales, and the payment is made in the year of

production.

Year

2019

2020

2021

2022

2023

Direct

= 10200 x

= 13800 x

= 24000 x

= 18000 x

= 15000 x

Labor

0.25

0.25

0.25

0.25

0.25

= RM 2550

= RM 3450

= RM 6000

= RM 4500

= RM 3750

e) Factory overhead is budgeted at RM1.2 million per year, and the payment is made in the year of production.

Year

2018

2019

2020

2021

2022

2023

Factory

0

1200

1200

1200

1200

1200

Overhead

f)

Selling and administrative costs are anticipated to be RM1.8 million per year, and the

payment is made in the year of production.

Year

SELLING AND

2018

2019

2020

2021

2022

2023

1800

1800

1800

1800

1800

ADMINISTRATIVE

g) Other cash expenditures include the following:

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Cash expenditures on the acquisition of new fixed assets and equipment: -RM375, 000 in the year 2019 -RM525, 000 in the year 2023 YEAR

2018

2019

2020

2021

2022

2023

FIXED ASSETS AND EQUIPMENT

0

375

0

0

0

525

Cash expenditures on dividend payments: -RM300, 000 in the year 2019, 2021 and 2023 YEAR

2018

2019

2020

2021

2022

2023

DIVIDEND

0

300

0

300

0

300

Amount of interest payment -RM675, 000 in the year 2019, 2020 and 2021 YEAR

2018

2019

2020

2021

2022

2023

INTEREST PAYMENT

0

675

675

675

0

0

-Increase 5% from the last amount and will be paid in the year 2022 onwards. Payment of taxes estimated at RM225, 000 in the year 2019 and will increase 10% every year.

12

YEAR

2018

2019

2020

2021

2022

2023

TAXES

225

225

248

272

299

329

13

h) In preparing the cash budget from the year 2019 to 2023, it also assumed that the beginning cash balance in year 2019 is RM1.5 million. Besides, it is assumed that the minimum desired cash balance is RM1.5 million. The yearly cash deficit will indicate the amount of financing required to maintain the minimum yearly cash balance.

Year

2018

2019

2020

2021

2022

2023

Net cash flow

0

= 7,488 10,695

= 11,919 13,103

15,450 18,647

19,950 14,808

19.050 14,199

= -3,207

= -1,184

= -3,197

=5,142

=4,851

-3,207

-1,184

-3,197

5,142

4,851

1500

(-1,707)

(-2,891)

(-6,088)

(-946)

0

(-1,707)

(-2,891)

(-6,088)

(-946)

3,905

(-) Minimum cash balance

0

1500

1500

1500

1500

1500

Surplus /Deficit

0 (-3,207)

(-4,391)

(-7,588)

(-2,446)

2,405

Cash reconciliation (Net cash flow)

0

(+) Beginning Cash Balance

0

Ending balance

14

4.0 RESULTS MAJU BERHAD HOLDING BERHAD CASH BUDGET FOR THE FIRST 5 YEARS(RM'000)

2018

2019

2020

2021

2022

2023

2024

SALES

9,876

10,200

13,800

24,000

18,000

15,000

9,000

CASH SALES (25%)

2,469

2,550

3,450

6,000

4,500

3,750

2,250

CREDIT SALES (75%) 1 YEAR AFTER SALES ( 50%) 2 YEARS AFTER SALES (25%) PREPAID LEASE PREPAID FIRE INSURANCE

7,650 4,938 0 0

10,350 5,100 2,469 0 900

18,000 6,900 2,550 0 0

13,500 12,000 3,450 0 0

11,250 9,000 6,000 300 0

6,750 7,500 4,500 0 0

(a) TOTAL CASH RECEIPTS

7,488

11,919

15,450

19,950

19,050

14,250

4,830

8,400

6,300

5,250

3,150

0

3,570 2,550 1,200 1,800 375 300 675 225

4,830 3,450 1,200 1,800 0 0 675 248

8,400 6,000 1,200 1,800 0 300 675 272

6,300 4,500 1,200 1,800 0 0 709 299

5,250 3,750 1,200 1,800 525 300 744 329

3,150 2,250 1,200 1,800 0 0 781 362

10,695

13,103

18,647

14,808

14,199

9,544

-3,207

-1,184

-3,197

5,142

4,851

4,706

NET CASH FLOW

-3,207

-1,184

-3,197

5,142

4,851

4,706

(+) BEGINNING CASH BALANCE

1,500

-1,707

-2,891

-6,088

-946

3,905

ENDING BALANCE

-1,707

-2,891

-6,088

-946

3,905

8,612

(-) MINIMUM CASH BALANCE

1,500

1,500

1,500

1,500

1,500

1,500

SURPLUS / DEFICIT

-3,207

-4,391

-7,588

-2,446

2,405

7,112

1. RECEIPTS

2. DISBURSEMENT PURCHASEONMATERIAL 1 YEAR BEFORE SALES (35%) CREDITPAYMENT CREDIT PAYMENT AFTER 1 YEAR DIRECT LABOR FACTORY OVERHEAD SELLING AND ADMINISTRATIVE FIXED ASSET AND EQUIPMENT DIVEND INTEREST PAYMENT TAXES

(b) TOTAL CASH DISBURSEMENT

3,570

3. NET CASH FLOW TOTAL RECEIPTS - TOTAL DISBURSEMENT (a-b)

4. CASH RECONCILIATION

15

5.0 CONCLUSION A cash budget is a useful tool for property managers. Without a forecast of cash inflow and outflow, managers may be caught unawares by unexpected cash flow difficulties which, in turn, may threaten their company’s creditworthiness. Property managers can compelled to plan ahead and prepare for potential problems with a cash plan instead of making hasty decisions when suddenly confronted by difficulties. The cash budgeting process can also be used to evaluate the company’s performance at the end of the budget period. Cash budgets consist of cash receipts which include all of a firm's inflows of cash in a given financial period such as cash sales, collections of accounts receivable. Next is cash disbursements these are all outlays of cash by the firm during a given financial period for example cash purchases, wages and salaries, taxes paid (Kim, 1978). Net cash flow this is the mathematical difference between the firm's cash receipts and its cash disbursement in each period. Lastly is ending cash, it's the sum of the firm's beginning cash and its net cash flow for the period (Kim, 1978).

In this study, we were asked to prepare cash budget for Maju Jaya Holding Berhad’s for the year 2019, 2020, 2021, 2022 and 2023. The sales started RM10,200, Rm13,800, RM24,000, RM18,000 and RM15,0...