In the search for efficient administration of their financial resources in the short term, companies make many efforts. However, many times the financial manager does not carry out adequate planning of the use of his cash, thus incurring in opportunity costs as well as unnecessary costs.
Through the Cash Budget, and the determination of the cash required by the company, it is possible to foresee the possible deficits or excesses that could be had during the year, to achieve the option that leads to lower costs or invest its excesses in the best alternative temporary investment.
In today's business world, with a global economic crisis that announces major consequences for national economies, all actions that involve the increasingly efficient use of resources must be carried out.
The application of recommended financial techniques, control of resources and adequate planning are essential to achieve efficient administration of resources, both in the short and long term.
Cuba, which does not escape the effects of the international crisis, or the current trends in the business world, is also immersed in the logic of trying to manage its resources as efficiently as possible.
However, it is still common to find companies that do not plan their cash through the Cash Budget, a technical of great importance, used to anticipate needs or excesses of cash, an essential issue for companies in the search to achieve efficient administration.
Cash Budget. Useful in forecasting cash deficits and / or surpluses…
It is a strategy of the management of net working capital, in the case of cash management, the preparation of the cash budget, however, many companies still do not know the usefulness of this technique. The cash budget is a technique with which the deficits or surpluses that the company will have in a planned period can be forecast. The great utility it has is that it helps to plan the excesses or needs that it will have in future periods, investing, or giving adequate use to the excesses and looking for financing alternatives to the needs; giving the company time to negotiate them, looking for those that are less expensive.
The implication of not making the cash budget is having to avail itself of any financing alternative that the company has at its disposal to solve the financial problem that it presents at that time, even if this means incurring higher costs. With this budget, the company has the exact idea of the amount to be asked, avoiding unnecessary interest payments for requested amounts that are not in correspondence with what is really needed; or the possibility of having to ask again for not having satisfied with the previous sum, the existing need. Not applying it also implies the inappropriate use of excess cash, or the non-use of said excess, incurring opportunity costs for not investing them in an alternative investment.
It is very difficult to understand that there are companies that are capable of planning their income and expenses for the next year, even that they have them distributed up to months, and yet they do not include the cash budget in their planning.
It is very curious to see, in addition, how many companies do not determine what their required cash is; on the one hand, they maintain balances high enough to incur opportunity costs, and instead of trying to invest the money that they are not going to use in their current operations, they keep it in their accounts without any use; and, on the other hand, because it is common to see how they do not know the cash they require for their operations, it is possible that sometimes they do not have enough cash in their accounts to carry out their current operations, such as purchases necessary for the period or the payment to its suppliers in the established time, even losing the possibility of discounts for prompt payment.
The cases previously exposed, in general, are caused by the lack of knowledge on the part of the company of the existence of the possibility of knowing the required cash to cover its current operations, without exceeding or not reaching enough, when needed. Hence the importance of determining it, to work efficiently.
Procedure to prepare the Cash Budget.
To make the cash budget, you must first determine the cash required by the company to carry out its operations, which can be found by dividing the expected disbursements by the cash turnover.
The latter is recognized by most companies through their activity reasons, which are used by them to diagnose their financial situation.
The determination of the required cash could also be carried out by other well-recognized methods such as Baumol and Miller Orr, depending on the characteristics of the operations of each company. Although due to the characteristics of Cuban companies, in which cash inflows and outflows are not always known with certainty, nor is there a market where marketable securities are traded, the technique mentioned in the previous paragraph, which uses cash turnover, is recommended..
After having determined the required cash, to the projected inflows according to the company's income plan, among which are cash sales, collection of credit sales and other cash inflows; (as shown in table No. 1), taking into account the collection strategy that the company has; The projected outputs are subtracted, according to the spending plan, among which are cash purchases, payment of accounts payable, payment of dividends, leases, salaries, payment of taxes, purchase of fixed assets, interest payments on the liabilities, amortization of loans, payments to sinking funds and buy-backs or withdrawals of shares, among other exits; also taking into account the way in which the company makes its payments.
To the result of this subtraction, which would be the Net Cash Flow, the Initial Cash Balance is added, which for the first period coincides with the value shown in the General Balance, obtaining the final Cash Balance, which would become the beginning balance for the next period. Then, from the final balance of each period, the previously determined cash requirement is subtracted, thus obtaining the expected need or excess for each period.
Table No. 1 shows one of the most used models for the realization of the cash budget. Any variant is well accepted as long as the proposed objective is reached, which is to forecast the possible needs or excess cash that the company will have in future periods.
Table No. 1 General Cash Budget Model
| January | February | March | …December | |
| Cash inflows | ||||
| Less: Cash Disbursements | ||||
| Net cash flow | ||||
| Plus: Starting Cash Balance | ||||
| Ending Cash Balance | ||||
| Less: Cash Required | ||||
| Need or Excess Cash |
The periods projected within the budget can be monthly, quarterly, or semi-annual, among others, according to the convenience for each entity of how it prefers to have the information.
It is very important to bear in mind, in addition, that the technique does not end only with the realization of the budget, but also requires the supervision and analysis of the behavior of the inputs and outputs in each period, which could vary, so You should rework the budget from time to time, so that the company is always aware of how its cash will behave.
An example…
To demonstrate in practice the usefulness of preparing a cash budget, the following is the example of a Cuban company dedicated to maintenance of power plants; that for reasons of discretion it is preferred not to reveal your name, in addition to recognizing that said data would not affect the idea you want to convey at all.
This Company has had several problems with its availability to make payments at certain times within the year; For this reason, it was forced to request a loan for 7 million pesos in 2007, and then in 2008, again, it found itself in the same situation. These requested amounts were not analyzed; for the orders, an estimate was made of what was needed without any economic-financial basis to justify its magnitudes.
The interesting thing about the matter is that this Company has had liquidity in both years, only that at times it has had urgent needs, which it has had to solve with the loans granted by its Higher Body, who has been able to respond at all times in that it has made the requests, due to the necessity of the services provided by the Company for the Country.
Logically, its Higher Body is very concerned with this situation, since every time the Company asks for the loan urgently, it is forced to request, also urgently, the loan from the Bank, having to accept any condition, without being able to analyze in advance any other possibility that may be less costly for the body. On the other hand, it also fears that at some point it will not have the conditions to request the loan from the Bank due to the urgency with which the Company makes the requests, and it will not be possible, for this reason, to cover said request, with the pertinent consequences.
This Entity, when an analysis of its net working capital management was carried out, it was detected, among other problems, that it did not plan its cash, nor did it determine its annual cash requirement.
If the Company carried out a cash planning through the cash budget, this situation described above would be reversed, since it would know the exact moment in which it would have the cash needs, and in this way, its Higher Agency could plan better and obtain the financing in a more leisurely way, with time to make your requests to the Bank, so that you can look for alternatives that are less expensive.
Based on the cash turnover calculated by the Company in its financial diagnosis through financial ratios, based on the collection, inventory and payment cycles, as well as the total disbursements taken from the budget for expenses and purchases, and From the way the Company makes its payments, the required cash was determined, as shown in table No. 2.
Table No.2: Determination of cash turnover for 2009.
| Rotation | |||
| Inventory | Accounts Receivable | Debts to pay | Cash |
| 5.40 | 9.15 | 6.72 | 7.83 |
Source: self made.
Required Cash Balance = Total annual
disbursements / Cash turnover = $ 80 925 268.23 / 7.83
= $ 10 335 283.30
As shown in table No 2 based on the characteristics of the Entity of its activity indices, it needs to keep in the account Cash to carry out your operations smoothly $ 10 335 283.30. With this data and with the projections of income and expenses, the Cash Forecast can be made.
As cash inflows, all expected cash inflows are recognized in the period, extrapolating the way in which the Company makes its collections, based on the structure of the Company's age of balances of 30, 60, 90 and more than 90 days. This assumption is made because this Entity, and a good number of companies like the one analyzed, do not have a policy to estimate the probable behavior of these percentages for the future.
On the other hand, cash outflows include all expenditures constituted by payments for purchases (entirely on credit), the payment of general and administrative expenses and salaries, among other planned payments, defining, in turn As making payments, the same structure revealed by the analysis of the Company's accounts payable balances aging, using the same assumption as accounts receivable.
In this case, the cash budget was made quarterly, for simplicity, but it could have been done monthly, semi-annually or as understood by the financial administrator who wishes to prepare the budget.
Then, deducting the estimated money disbursements from the cash receipts of each quarter, the Net Cash Flow is obtained, which, when the Cash Balance is added at the beginning of each period, shows the cash balances expected at end of each period, as shown in table No. 3.
Table No.3: Cash budget for 2009.
| Games | I Trimester | II Trimester | III Trimester | 4th trimester |
| Total cash inflows | $ 20489682.00 | $ 18 550 359.88 | $ 17816004.80 | $ 17869221.00 |
| Total cash outflows | $ 16730485.27 | $ 22577492.29 | $ 20757349.49 | $ 20859941.18 |
| Net cash flow | $ 3759196.73 | $ -4027132.41 | $ -2941344.69 | $ -2990720.18 |
| (+) Cash balance at the beginning | 7486325.00 | 11245521.73 | 7218389.32 | 4277044.63 |
| Cash balance at the end | $ 11245521.73 | $ 7218389.32 | $ 4277044.63 | $ 1286324.45 |
| (-) Required cash balance | 10335283.3 | 10335283.30 | 10335283.30 | 10335283.30 |
| Surplus or Deficit | $ 910238.43 | $ -3116893.98 | $ -6058238.67 | $ -9048958.85 |
Source: self made
As can be seen in table No. 3, the Company will have an excess in the first quarter, and then have a need for financing in the second, third and fourth quarters. With this information, the Company already has an idea about what will happen to its cash, it will even know the moment and the proportions that it will have to ask its Higher Body. This budget is also very beneficial for the Higher Agency, since it will have time to find its best financing alternative; and also, you will be able to make your planning based on these requests that the Company will make in the second, third and fourth quarters.
With a complete study of its net working capital management, taking all the pertinent measures, the Entity can try to reduce these deficits in its budget, taking measures such as carrying out a more restrictive policy in its collections if the relationship is feasible. cost-benefit of it; delay your payments as much as possible, without affecting your credit reputation, as well as take measures with the management of your inventories trying to sell your idle inventories, or having a detailed control of your stocks, and avoid unnecessary purchases, which would have a positive effect on the cash budget, thus achieving the reduction of your needs.
With an efficient management of the net working capital, carrying out all the strategies in conjunction with greater productivity, it would be achieved instead of necessity, excesses, which could be used to pay the debts to your Higher Body, or to your creditors, or to buy materials. raw materials and materials that help increase sales. In the event of an increase in excess cash, these could be invested in an alternative that reports earnings to the Entity in the form of financial income.
Many companies are currently in the same or similar situation as the previous company, since they ignore the benefits of the cash budget.
There are other companies that have a cash budget, instead of showing a deficit as in the previous example, where the Company would have to look for those financing options that report lower costs; they project balances with surpluses, so that they, in this case, could use this excess to temporarily invest them in marketable securities. In Cuba, for example, this last option is not feasible, because there is no market where these types of securities are traded, but other alternatives could be studied, such as depositing these excesses in a fixed-term deposit for as long as they last. These excesses, or they could simply be used to pay past due debts or amortize debts of the company, as well as buy merchandise that report a greater cash inflow to it,among other alternatives that could be valued with enough time.
It is very important to highlight and emphasize that the implementation of the preparation by companies of the cash projection does not simply end with the realization of it, but continues with its execution, monitoring and control. It is essential to evaluate the results achieved with respect to the established projection, so that the necessary adjustments can be made, thus implementing the corrective measures or modifications to the budget.
Concluding…
Despite how well known the Cash Budget is in the business world, there are still companies that do not use it; they even ignore the Required Cash, despite how necessary it is for their efficiency.
Knowing the deficits in good time allows companies to look for financing alternatives that are less expensive for them; As well as forecasting surpluses, it allows looking for alternatives on where to locate them efficiently. Once a projected deficit has been detected, a detailed study of all possible financing alternatives should be carried out, choosing the one that reports the lowest cost. In the case of projected surpluses, the entity must use them in temporary investments, in fixed-term deposits, payment of past due debts, amortization of loans, purchases of highly useful materials, etc. For these reasons it is of great importance to determine the cash required by the company and the planning of its cash.
It is essential to constantly monitor the evolution of the cash budget, once it has been prepared, to make the necessary adjustments to keep the behavior of cash up to date, and to take the pertinent measures in each case.
