Cash Management and Budgeting Concepts

Budgets (2/2) - Financial Forecasts

• Céline Baud, Penelope Van den Bussche, and Anne Bizière presented on budgets and financial forecasts.
• The forecasts cover the 2020-2021 period.

Reminders: Operating Budgets

• A summary of operating budgets was discussed.

Articulation of Budgets: Towards the Operating Result

• Commercial budget, Sales program, Production budget, Supply budget (raw material), General and administrative expenses budget drive the calculation of production costs and forecast P&L Account.
• Purchases/investments budget and other manufacturing costs budget are also part of the operating result forecast.

Articulation of Budgets: Towards the Balance Sheet Forecast (1)

• Commercial budget, Sales program, Production budget, Supply budget (raw material), General and administrative expenses budget are inputs into the calculation of production costs and forecast P&L.
• Purchases/investments budget, Other manufacturing costs budget, and Inventories are included in the forecast for the balance sheet.
• The balance sheet forecast includes fixed assets, and net income.

Budgets over Different Periods

• The president of Exploit wants refined forecasts, especially considering seasonality which influences sales.

• Sales estimates for 2019: Q1 - 10,000 units, Q2 - 10,000 units, Q3 - 15,000 units, Q4 - 25,000 units.

• This data has an impact on operating forecasts.

• Impact of choices and methods on the result:

  • Inventory valuations (methods and periodicity)
  • Fixed cost allocation (proportional or not).

• Balancing Sales, Stocks, Production and Purchases:

  • Limiting stock levels; warehouse costs up to 3-20% of inventory value.
  • Budget programs should avoid being out of stock or exceeding production/storage capacity.

Financial Budgets and Their Roles

• Different aspects of financial budgets and their roles in decision making were discussed.

Role of Financial Budgets

• Profit analysis (margins, cost of goods sold) & Return on Capital Invested (ROI, residual profit)
• Medium/long-term financial needs, including fixed assets, management of work-in-progress, debt ratios, leverage and solvency.
• Short-term financial needs (cash management)

Cash Flow Budget

• All forecasts concerning receipts & payments fall under the definition of a cash flow budget.
• Inflows (received), payments (outflows), Change in cash, Opening cash & Closing cash are all important components of the cash flow.
• The cash budget structure should be simple; inflow and outflow items must be clearly identified.
• If cash balance falls below a desired minimum, a short-term bank loan may be needed.

Articulation of Budgets: The Cash Flow Budget

• Commercial budget, Sales program, Production budget, Supply budget (raw material), General and administrative expenses budget and related items such as workforce budget, calculation of production costs influence the cash flow.

Cash Flow Budget and Cash Requirements

• Payment policies and negotiation power with customers and suppliers are parameters of cash flow.
• Inventory turnover rate is important in managing working capital.
• Payment terms for taxes, duties, and social security charges influence cash flow.
• Investments policy and financing policy (financing investments and repaying current loans) are critical to cash requirements.
• Be wary of factors like sales/purchases on credit and deferred tax payments; loan repayment has to be taken into account.

Articulation of budgets: The Cash Flow Budget (Part 2, Question 2)

• Exploit's president wants a refined cash flow budget and complete balance sheet.
• Customer payment terms are 60 days, evenly distributed.
• Raw material payments are 90 days.
• Investment made at year start; 50% of new tooling financed through loan.
• The remaining 50% is paid out over Q2, Q3, and the rest of Q4.