FIN534 Week 9 Scenario Script: The Cash Budget

FIN534 Week 9 Scenario Script: The Cash Budget
Scene/Interaction
Narration

Slide
1

Intro Scene

Slide
2

Scene 2
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Don in front of TFC with
Linda

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End of scene

FIN534_9_2_Don-1: Good day, Linda. The
Dividend policy review was fantastic. Knowing
where we stand as a company and how we can
reward our shareholders is great
management/investor relations. As managers,
we have certain commitments to TFC that
include shareholder wealth, but also long term
success of the company. As investors, while
long term success is good, they would like to
see a return on their investment. Being able to
provide some type of return through dividends
and accruing potential stock growth is a good
business practice for us, especially if we have
strong financials to back it up.
As you know, we are a conservative company
that may be going through a major expansion.
The board has not yet voted on the approval of
the expansion project. Two of the board
members recommended that we look at our
Cash Budget.
Since we are a conservative company we
always want to make sure we are managing our
cash effectively. So I would like you to proceed
with an analysis of the Cash Budget for the last
half of the year to see where we stand.
Good luck! And if you don’t mind I would like
to stick around and help out with this
assignment.
FIN534_9_2_Linda-1: Don, we are looking
forward to it. This will allows us to get a better
grasp on where the cash is and where it is going.
I am supposed to meet the Intern in the
conference room now. Please come and join us,
as another financial mind is always a financial
plus.
<laughter>

Slide
3

Scene 3
Linda in the conference room

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Cash Budget on Screen

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Go to next slide

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Slide
4

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(Is the Intern in the room?)

Scene 4


Dollar Sign



Linda speaking

FIN534_9_3_Linda-1: Cash budgets are
important for businesses and personal use.
They can help you see where money is coming
in and going out. They can be for any length of
time or over a time frame. The more frequent
the time frame the more you will see where
money is going. For example if you create a
daily budget you can see where everything is
going on a daily basis. But sometimes it is not
necessary and monthly budgets will be better
suited as payments that are made on a monthly
basis. But ultimately it is up to the company or
individual as to what suits them best.
FIN534_9_3_Linda-2: At TFC we never really
analyzed our Cash Budget. That might seem
odd for a company our size, but we were always
cash conscious so as long as we had sufficient
cash we were fine with our cash account.
However, with a project of this magnitude
analyzing the Cash Budget is important.
FIN534_9_4_Linda-1: Since we prepared our
Cash Budget for this year, a lot has changed.
The expansion project has made us revisit our
Cash Budget. It is also a time for us to look at
how we collect and pay out to see if change is
needed.
We have decided to only look at the last six
months of the year to see what our cash will
look like on a monthly basis. Typically our
Cash Budget would be for twelve months, but
this expansion project is an exception.
As you have noticed, when financial forms are
created there is a chance that they will be
revised. A huge undertaking like this expansion
has created a need to revisit it.
There are many types of Cash Budgets and they
are created to meet the needs of the business or
individual. There are a lot of projections that
go into them so it is important that we have
analyzed the projections before making a
decision on what to use.

Slide
5

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Cash Budget

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Show Excel file

<click of file or have it open on the
side>

FIN534_9_5_Linda-1: Let’s take a deeper
look into our Cash Budget for the next six
months.
At TFC we try to work with our “Body
Builders”, by offering different payment plans.
We don’t offer a discount to our Body Builders
as we believe our service and offerings are the
difference with our competitors. But we do offer
one month deferral at the same price. You can
call it a pay after the fact policy.
From past history and what the Accounting
Department has supplied, fifty percent of our
Body Builders pay in the current month while
forty-five percent take advantage of the one
month deferral option. The remaining five
percent pay in the second month. Also,
Accounting has told us that our delinquent rate
for those “non-payers” is one percent.
FIN534_9_5_Don-1: Linda, I know we will
revisit this later but one thing that I am
concerned about is the forty-five percent one
month deferral rate. What would happen if out
Body Builders decided not to pay?
FIN534_9_5_Linda-2: Don, excellent point
and something we will look at with our analysis.
From our Days Sales Outstanding ratio, we are
well below the average, but this is worth some
more analysis. Before doing so, let’s look at
some other entries in the Cash Budget.

Slide
6

Scene 6
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Linda speaking – Cash Budget
expenses

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Reinvestment of Dividends

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Stock Dividends

FIN534_9_6_Linda-1: On the payments side of
our Cash Budget, our biggest cash outflow will
be for operating expenses. We also pay taxes
on a quarterly basis which does cut into our
cash account. Also we are projecting partial
payment for our expansion project in the last
three months of the year.
We also projected the dividend payout at the end
of the year. We only used half of the total
payout as our Cash Budget is only for the last
six months of the year.

Slide
7

Scene 7
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Don speaking

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Analyzing the Cash Budget

FIN534_9_6_Linda-2: Don, let us tap into your
financial mind. What can you tell us about the
Cash Budget?
FIN534_9_7_Don-1: We would like to have a
target ending cash amount of ten million dollars,
but that is going to be tough to meet each
month. In doing so, we are projecting to have
negative cash balances in two of the six months.
That is a concern. But the bigger concern is
what I mentioned earlier. Our payment plan is
really beneficial to our Body Builders.
With competition being at an all time high, we
need to have creative payment plans but we also
need to pay the bills! With forty-five percent of
our payments not being collected in the current
month, we are really opening ourselves up.
However, we do have a really good collection
rate of ninety-nine percent. If we can sustain
that, then the forty-five percent deferred
payment to month one may not be that bad
Another area to look at is this expansion project.
If TFC is paying eight million each month, we
are looking at some negative months amounts.
It also shows that our earlier month, before the
expansion, is helping in the expansion months.
Also, the cash dividend payment will really
drain our cash account.
This, however, is expected from a cash
perspective for a project of this magnitude. But
can anything be done? We are still in
negotiations with the buyers of the facilities that

are part of the expansion project. Maybe we
can review some situational analyses to see if
we can strengthen our cash balance per month.
Slide
8

Scene 8 - CYU
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Don would like you to do
some situational analysis to
look at the Cash Budget
further

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1) What happens if we change
the $8,000 to $4,000 for the
Payment for expansion project
and loans line item?

A) Cash flow is in a better position
(correct answer – Correct! By freeing
up payments, TFC will be in a better
cash position)
B) Cash flow is in a worse position
(Nice try, but the company was able to
free up cash which will result in better
cash flow in meeting its goals.)
c) Cash flow is in the same position
(Nice try, but the company was able to
free up cash which will result in better
cash flow in meeting its goals.)

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2) - What happens to the
overall cash at end of the year
when you change bad debt to
3%?

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A) Cash flow increases by
$6,400 (Nice try but since the
bad debt expenses – not
getting paid- went up, it will
have a negative impact on cash

flows
•

B) Cash flow decreases by
$6,400 (Excellent! Increasing
bad debt will negatively affect
cash and decrease it.
Management needs to take this
into consideration when setting
goals.)

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3) What happens at end of year
if we remove dividend
payment?
A) Ending cash will be
$25,000

C) Ending cash will be positive
$16,250 (Correct – freeing up $25,000
will increase cash from a negative $8,750. But is this a choice that the
company would want to make?)

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D) Ending cash will be
negative $16,250 (Nice try but
the company was able to free
up cash which will result in
better cash flow in meeting its
goals)

•
•

Slide
9

Next slide

Scene 9 –
Don in room
Disadvantages of repurchasing
shares

FIN534_9_9_Don-1: Good analysis. Cash is
our building block and changes to our inflows
and outflows can make a difference to the
bottom line. The last choice that was given
involved eliminating the cash dividend. While
it would create a lot of extra cash for us, that
choice may not be the best.
Paying a dividend can help increase investor

satisfaction and possibly reduce agency
conflicts. Maybe a better choice would be to
look at other ways TFC can increase its cash
position. The change in the payment schedule
helped free up cash while still being able to
make a dividend payment. This may be a better
way to go if a suitable payment plan can be
negotiated with creditors.
As you were able to see, the Cash Budget is
good for creating those “What if?” scenarios.
FIN534_9_9_Linda-1: Don, I understand now.
I know we have always been concerned with
cash but this brings it to another level.
Now that we are on the Cash Budget. It looks
very similar to the income statement. Can the
Cash Budget replace the income statement?

Slide
10

Scene 10
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Show difference between Cash
Budget and income statement

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Next screen

FIN534_9_9_Don-2: Linda, very good
question. The quick answer is they are very
different although they appear to be similar.
Let’s look at some of the key reasons.
FIN534_9_10_Don-1: At first look you can see
how the Cash Budget and income statement
could be similar but here are some differences.
First, typically income statements are on an
accrual basis, meaning the expense or revenue
is recorded when incurred not when cash
actually changes hands.
Second, Income Statements are more concerned
with revenue and not collecting the revenue.
The Cash Budget focuses on the collections
piece in the form of cash.
Third, depreciation of a fixed asset is shown on
an income statement as an expense where the
Cash Budget looks at the cash transaction of the
asset.
So while, they appear to look the same, they are
different. They both are important in the
financial analysis of TFC and are related in

certain aspects, but there are also differences, as
each one has a specific purpose. The Income
Statement looks at profit or loss over a specific
period while the Cash Budget looks at TFC’s
liquidity position in the future.
Slide
11

Scene 11
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CYU

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Select all the reasons how
Income statements differ from
Cash Budgets

Choices:

A) Cash Budgets are recorded on a
cash basis while Income Statements
record transactions on an accrual basis
(Correct – cash budgets want to see
how cash is changing while income
statements are more focused on
profits)

B) Depreciation Expense is recorded
as an expense on Income Statements
but not with Cash Budgets. (Correct –
Depreciation is not recorded on Cash
Budgets because cash is not changing
hands)

C) Dividend policy is determined but
Cash Budget not Income Statement
(Incorrect – while both the Cash
Budget and Income Statement are
considered when establishing the
dividend policy the Board of Directors
will approve the dividend payments

D) Income Statements are more about
profitability while Cash Budgets are
about liquidity (Correct – Cash
budgets are concerned about cash
inflows and outflows)
•

Slide
12

Next Slide

Scene 12
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Don in conference room
Linda in conference room

FIN534_9_12_Don-1: Excellent work. Linda
your Intern is incredible.
FIN534_9_12_Linda-1: I know Don.
Throughout this entire process the Intern has
been doing great work. You can tell that Strayer
University is really preparing their students in
making these difficult financial decisions.
FIN534_9_12_Don-2: I agree Linda. Keep in
mind that the Cash Budget that TFC prepared
covers the areas of bringing in cash and
spending it. Detailed analysis is needed to help
with decision making. And our analysis has
shown us that we need to look at our payment
plans to our Body Builders as well as
negotiating our capital expenditure for this
expansion project.
I will be meeting with Joe later to share the
results with him

Slide
13

Scene 13
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Linda Summary slide



Next Slide

FIN534_9_12_Linda-2: And let’s not forget
our Board members. If it weren’t for them we
would not have analyzed both the Dividend
Policy and Cash Budget as we did. It is nice to
have an engaging Board of Directors who know
what questions to ask.
FIN534_9_13_Linda-1: The Cash Budget is a
financial form that appears to be straightforward
is more than that. As we see, the Cash Budget
is very important! It allows us to determine how
much credit can be extended before we have
liquidity problems.
We started by looking at TFC’s remaining six

month Cash Budget. Typically Cash Budgets
are on a year basis but since we want to work on
the project now, we reviewed the last six
months. We learned that while the Cash Budget
may look like the Income Statement, there are a
lot of differences. One of the primary
differences is that the Income Statement is
usually on an accrual basis while the Cash
Budget is on a cash basis.
We also learned that detailed projections are
important as they are used to assess the overall
expected cash position of TFC. And any change
in them can affect this expected cash position.
And let’s not forget that Income Statements are
primarily focused on profitability while Cash
Budgets are focused on liquidity.
So while TFC has many financial forms, each
has a particular emphasis. The Cash Budget
focuses on the inflows and outflows of cash.
And we all know how important cash is to TFC.

Slide
14

Scene 14
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Closing slide

All this talk about cash has made me ready for a
workout. Let's go!
Closing slide