FIN534 Week 9 Scenario Script: The Cash Budget Slide #

FIN534 Week 9 Scenario Script: The Cash Budget Slide #

FIN534 Week 9 Scenario Script: The Cash Budget
Slide#
Scene/Interaction
Narration
Slide 1
Intro Scene
Slide 2
Scene 2• Donin front of TFC with Linda• Endof scene
FIN534_9_2_Don-1: Good day, Linda. The Dividend policy review was fantastic. Knowing where we stand as a company and howwe can reward our shareholders is great management/investor relations. As managers, we have certain commitments toTFC that include shareholder wealth, but also long term success of thecompany. As investors, while long termsuccess is good, they would like to see a return on their investment. Being able to provide some type of returnthrough dividends and accruing potential stock growth is a good businesspractice for us, especially if we have strong financials to back it up.
As you know, we are a conservative company that may be going througha major expansion. The board has notyet voted on the approval of the expansion project. Two of the board members recommended thatwe look at our Cash Budget.
Since we are a conservative company we always want to make sure weare managing our cash effectively. SoI would like you to proceed with an analysis of the Cash Budget for the lasthalf of the year to see where we stand.
Good luck! And if you donâ€tmind 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 abetter grasp on where the cash is and where it is going. I am supposed tomeet the Intern in the conference room now.Please come and join us, as another financial mind is always afinancial plus.
Slide 3
Scene 3• Lindain the conference room• CashBudget on Screen• Goto next slide• (Isthe Intern in the room?)
FIN534_9_3_Linda-1: Cash budgets are important for businesses and personal use. They can help you see where money is comingin and going out. They can be for anylength of time or over a time frame.The more frequent the time frame the more you will see where money isgoing. For example if you create adaily budget you can see where everything is going on a daily basis. Butsometimes it is not necessary and monthly budgets will be better suited aspayments that are made on a monthly basis.But ultimately it is up to the company or individual as to what suitsthem 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 wewere fine with our cash account.However, with a project of this magnitude analyzing the Cash Budget isimportant.
Slide 4
Scene 4·Dollar Sign·Linda speaking
FIN534_9_4_Linda-1: Since we prepared our Cash Budget for this year, a lot haschanged. The expansion project hasmade us revisit our Cash Budget. It isalso a time for us to look at how we collect and pay out to see if change isneeded.
We have decided to only look at the last six months of the year tosee what our cash will look like on a monthly basis. Typically our Cash Budget would be fortwelve months, but this expansion project is an exception.
As you have noticed, when financial forms are created there is achance that they will be revised. Ahuge undertaking like this expansion has created a need to revisit it.
There are many types of Cash Budgets and they are created to meet theneeds of the business or individual.There are a lot of projections that go into them so it is importantthat we have analyzed the projections before making a decision on what to use.
Slide 5
• CashBudget• ShowExcel file
FIN534_9_5_Linda-1:Letâ€s take a deeper look into our Cash Budget forthe next six months.
At TFC we try to work with our “Body Buildersâ€, by offering differentpayment plans. We donâ€t offer adiscount to our Body Builders as we believe our service and offerings are thedifference with our competitors. But we do offer one month deferral at thesame price. You can call it a payafter the fact policy.
From past history and what the Accounting Department has supplied, fifty percent of our Body Builders payin the current month while forty-fivepercent take advantage of the one month deferral option. The remaining five percent pay in thesecond month. Also, Accounting hastold 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 amconcerned about is the forty-fivepercentone 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 ouranalysis. From our Days SalesOutstanding ratio, we are well below the average, but this is worth somemore analysis. Before doing so, letâ€s look at some other entries in the CashBudget.
Slide 6
Scene 6• Lindaspeaking – Cash Budget expenses• Reinvestmentof Dividends• StockDividends
FIN534_9_6_Linda-1:On the payments side of our Cash Budget, our biggest cash outflowwill be for operating expenses. We also pay taxes on a quarterly basiswhich does cut into our cash account.Also we are projecting partial payment for our expansion project inthe last three months of the year.
We also projected the dividendpayout at the end of the year. Weonly used half of the total payoutas our Cash Budget is only for the last six months of the year.
FIN534_9_6_Linda-2:Don, let us tap into your financial mind. What can you tell us about the Cash Budget?
Slide 7
Scene 7• Donspeaking• Analyzingthe Cash Budget
FIN534_9_7_Don-1: We would like to have atarget ending cash amount of ten million dollars, but that is going to betough 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 iswhat I mentioned earlier. Our paymentplan is really beneficial to our Body Builders.
With competition being at an all time high, we need to have creativepayment plans but we also need to pay the bills! With forty-five percent of our payments notbeing collected in the current month, we are really opening ourselvesup. However, we do have a really goodcollection rate of ninety-nine percent. If we can sustain that, then the forty-fivepercent deferred payment to month one may not be that badAnother 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 reallydrain our cash account.
This, however, is expected from a cash perspective for a project ofthis magnitude. But can anything bedone? We are still in negotiations with the buyers of the facilities that arepart of the expansion project. Maybewe can review some situational analyses to see if we can strengthen our cashbalance per month.
Slide 8
Scene 8 – CYU• Donwould like you to do some situational analysis to look at the Cash Budgetfurther• 1)What happens if we change the $8,000 to $4,000 for the Payment for expansionproject and loans line item?A) Cash flow is in a better position(correct answer – Correct! By freeingup payments, TFC will be in a better cash position)B) Cash flow is in a worse position (Nicetry, but the company was able to free up cash which will result in bettercash 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 inbetter cash flow in meeting its goals.)
• 2)– What happens to the overall cash at end of the year when you change baddebt to 3%?• A)Cash flow increases by $6,400 (Nice try but since the bad debt expenses – notgetting 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 intoconsideration when setting goals.)• 3)What happens at end of year if we remove dividend payment?A)Ending cash will be $25,000C) 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 thecompany would want to make?)
• D)Ending cash will be negative $16,250 (Nice try but the company was able tofree up cash which will result in better cash flow in meeting its goals)•• Nextslide
Slide 9
Scene 9 –·Don in room·Disadvantagesof repurchasing shares
FIN534_9_9_Don-1: Good analysis. Cash is our building block and changesto our inflows and outflows can make a difference to the bottom line. The last choice that was given involvedeliminating the cash dividend. Whileit 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 possiblyreduce agency conflicts. Maybe abetter choice would be to look at other ways TFC can increase its cashposition. The change in the paymentschedule helped free up cash while still being able to make a dividendpayment. This may be a better way togo 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 withcash 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 incomestatement?
FIN534_9_9_Don-2: Linda, very good question. The quick answer is they are very differentalthough they appear to be similar.Letâ€s look at some of the key reasons.
Slide 10
Scene 10• Showdifference between Cash Budget and income statement• Nextscreen
FIN534_9_10_Don-1: At first look you can see how the CashBudget and income statement could be similar but here are some differences.
First,typically income statements are on an accrualbasis, meaning the expense or revenue is recorded when incurred not whencash actually changes hands.
Second, Income Statements are more concernedwith 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 shownon an income statement as an expense where the Cash Budget looks at the cashtransaction of the asset.
So while, theyappear to look the same, they are different.They both are important in the financial analysis of TFC and arerelated in certain aspects, but there are also differences, as each one has aspecific purpose. The Income Statement looks at profit orloss over a specific period while the CashBudget looks at TFCâ€s liquidity position in the future.
Slide 11
Scene 11• CYU• Selectall the reasons how Income statements differ from Cash BudgetsChoices:
A) Cash Budgets are recorded on a cashbasis while Income Statements record transactions on an accrual basis(Correct – cash budgets want to see how cash is changing while incomestatements are more focused on profits)
B) Depreciation Expense is recorded asan expense on Income Statements but not with Cash Budgets. (Correct –Depreciation is not recorded on Cash Budgets because cash is not changinghands)
C)Dividend policy is determined but Cash Budget not Income Statement(Incorrect – while both the Cash Budget and Income Statement are consideredwhen establishing the dividend policy the Board of Directors will approve thedividend payments
D) Income Statements are more aboutprofitability while Cash Budgets are about liquidity (Correct – Cash budgetsare concerned about cash inflows and outflows)• NextSlide
Slide 12
Scene 12•Don in conference room•Linda in conference room
FIN534_9_12_Don-1: Excellent work. Linda yourIntern is incredible.
FIN534_9_12_Linda-1: I know Don. Throughout thisentire process the Intern has been doing great work. You can tell that Strayer University isreally preparing their students in making these difficult financialdecisions.
FIN534_9_12_Don-2: I agree Linda. Keep in mindthat the Cash Budget that TFC prepared covers the areas of bringing in cashand spending it. Detailed analysis isneeded to help with decision making.And our analysis has shown us that we need to look at our paymentplans to our Body Builders as well as negotiating our capital expenditure forthis expansion project.
I will be meeting with Joe later to share the results with him
FIN534_9_12_Linda-2: And letâ€s not forget our Board members. If it werenâ€t for them we would not haveanalyzed both the Dividend Policy and Cash Budget as we did. It is nice to have an engaging Board ofDirectors who know what questions to ask.
Slide 13
Scene 13• LindaSummary slide
NextSlide
FIN534_9_13_Linda-1: The Cash Budget is afinancial 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 creditcan be extended before we have liquidity problems.
We started by looking at TFCâ€s remaining six month Cash Budget. Typically Cash Budgets are on a year basisbut since we want to work on the project now, we reviewed the last sixmonths. We learned that while the CashBudget may look like the Income Statement, there are a lot ofdifferences. One of the primarydifferences is that the Income Statement is usually on an accrual basis whilethe Cash Budget is on a cash basis.
We also learned that detailed projections are important as they areused to assess the overall expected cash position of TFC. And any change in them can affect thisexpected cash position.
And letâ€s not forget that Income Statements are primarily focused onprofitability 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 andoutflows of cash. And we all know howimportant cash is to TFC.
All this talk about cash has made me ready for a workout. Let’s go!
Slide 14
Scene 14• Closingslide
Closing slide

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