period.

Forecasting the Receipts :

i) Sales Based Receipts : The sales budget constitutes the foundatio? open which the entire
budget program of the firm is developed. An accurate sales budget 1s the product of a care.
ful forecast of sales, usually prepared by several methods to ensure that all facto~s affecting
the firm's sales have been considered. The sales forecast should be compared with the pro.
duction capacity of the firm to see whether the predicted unit sale are wit?in the ability of
the firm to produce. Finally, all the forecasts are brought tcget~er to determ_me whether lhere
is a consensus. If there is a difference, then it must be reconciled. Once this has been done,
the financial manager can begin the process of constructing the cash budget from the col-
lection of predicted sales.
At this stage, it is necessary, first, to separate cash sales from credit sales and then to analyze
the credit sales for the purpose of determining the time lag between sales and collection. Particular
care must be taken of the effect of seasonal variations and of general business conditions on the
collections and on the length of the collection period. Second, other factors affecting the firm's
collection must also be taken into account For example, the returns and allowances must be esti-
mated, particularly if cash refund is to be made. The amount of cash discount that the customers
are Hkely to take should also be estimated. The effect of any planned changes in either the credit
policy or the collection policy must also be taken.~ntp account.
ii) Other Receipts : Most of the business firms may receive cash during the course of their
operations from sources other than the sales of their prod_ucts and services. These receipts
may be of relatively small magnitude when compared to sales receipt yet must be included
in the cash budget. These cash inflows may include income from' property, interest and divi-
dends from investments, sale of assets and invest!llents, royalties _income_, etc. Suc:n receipts
generally do not pose much problem in forecasting, because they are of small magnitude
and specific. These items have only a minor impact on the overall cash budget.
 recasting the Payments :
t
Pay~~nts for Ma eria~s, et~. : The amount and the timing of payments for raw materials or
for fmished
th _goods ~unn~ ~iven period is closely related to the sales volume of the firm.
However, is relat_ionship is not necessarily precise. It may be upset by a decision to in-
crease or decrease size of any or all items of the inventories of raw materials, work-in-progress
or of finished goo~s. Obviously, an increase in inventories would require purchases in ex-
cess of those requ1red to support estimated sales. A decision to decrease inventories would
lower the volume of purchases needed. Also, a decision to produce highly seasonal goods
at a constant rates through out the year would require regular payments, though the goods
would be sold only during the season. Therefor~. while the volume of sales will determine
the basic purchase requirements, the production schedule and the inventory policies will
influence the timing and quantity of goods purchased. This in tum, will affect the cash out-
flows on account of payments for these purchases.
Payment for Operating Expenses : The cash disbursements for operating expenses may be
listed in the cash budget under the headings of manufacturing, selling and administrative
expenses. These expense categories may also be classified as fixed expenses, variable ex-
penses or semi-variable expenses, for purposes of forecasting the timing and ·magnitude of
cash outflows. Fixed expenses, by definition, are those that are expected to remain constant
regardless of the level of production.· Although, the level of these expenses is independent
of the level of production, they cannot be expected to remain constant forever. Any expected
change must be recorded in the cash budget. Variable expenses are those that are expected
to vary directly with the level of production or sales. Examples of these expenses may be
, packaging, sales commission and administrative costs.
iii) Other Cash Disbursements : Included in this category of other cash disbursements are items
th at usu all y creat e no Problem in forecasting the timing as well as amount of a cash d outflow.
· f
h fl
Sue out ows may e b relatl
. ng to interest payments,
. . repayments
. . of loans,
h re f emption od
debentures and pre1e_ & r ence s h ar.,
e capital , distnbution of d1v1dends, pure ase o assets an
investments _etc.
 To get an idea of the float mechanism and its utility in the management cash .
~utflows, one must know the related banking procedure. When a cheque is issued b "'6•~,
furn, the bank balance of the finn is not immediately reduced, rather the bank reduce;:, P%i
only when the cheque is presented to it either personally or through the clearing 'b~~
amount of cheques _issued but not presented for payment is known as the payment floa:Y~~"': l\,
when the firm receives a cheque from the customer and deposits the cheque in the finn• lllilar1y,
the amount is not immediately credited to the firm's account, rather the banks credits~~
amount only when it is cleared by the paying bank. The amount of cheques deposited in cheque t:
but not yet cleared, is known as the receipt float. The difference between the payment fie banks,
the receipt float is known as net float. oat ilnd

If a firm has positive net float (i.e. , the payment float is more than the receipt float) .
issue more cheques even if the net bank balance shown by the books of account may not b; it can
cient. A firm with a positive net float can use it to its advantage and maintain a smaller cas:~fi-
ance than it would have in the absence of the float. aJ.

The course of action adopted by a firm to manage the payment and the receipt float is kno
as playing the float, which has emerged as an important technique of cash management in most:~
the firms. Float management helps avoiding stagnation of funds. Money paid by cheques by cus.
tomers to the firm but not yet available to the latter, as it is tied in the float is a stagnant money.
Similarly, cheques issued but not presented to the firm's bank is stagnant money. This can be used
by a proper and careful float management.

Tiffin Services Ltd. issues cheques of Rs. 3,000 per day and receives cheques of Rs. 2,000 per day.
The payment float is 7 days while the receipt float is 2 days on an average. Find out different
floats for the firm.
Solution:
Different floats for the firm are as follows :
Disbursement = Amount x No. of days
= Rs.3,()()() X 7
= Rs.21,000
Collection Float = Amount x No. of days
= Rs.2,000 x 2
= Rs.4,000
Net Float = Disbursement Float - Collection Float
= Rs.21,000- Rs.4,000
= Rs.17,000
So the firm's net book balance is Rs.17,000 less than the actual balance available in the bank.
Jn;esting Surplus Cash : On the basis of the cash budget, the financial manager may fin:,':
excess cash will be available for some time. This excess cash may be temporanly 1dl~ or may P
t a permanent ,surplus balance. If the cash budget indicates that ithe excess cash 1s a permanen1
accumulation, then. it may be invested in some profi1table capita
sen . 1proJec
. t
.
. a particular
Howe ver if a surplus cash is expected m • mon th , or tor a short period ofdaearn
few
' · th· cess money
. onths only, then the financial manager should take steps to m~~st ts ex_ nd a lot depends an
m e in ~ome The determination of the surplus cash is a very cnt1cal exercise at1· ons precaution·
som " · . . H h uld take care of the transac ,
the experience of the fmanc1a1 manager. e s o . t h . estment of the sur-
upondeman d as well as sudden fluctuations in market before gomg or t e mv
ary

d
 sh- He should also
th be caref~l ~n .selecting the investments and proper attention shou~d ~e
us ca_th reference to ~ safet~, liquidity, return and maturity period of the investment. This as-
aid wt
has been discussed m detail at a later stage .

ct • Funds for Cash Shortages : If a financial manager is anticipating cash shortage in

,rangmg lar month, then he should devise ways to arrange additional funds for the requirement
nY ·parucu
d from some reliable source. 'these requirements of funds are generally for a short duration
d
er10 d hence funds from short term sources of finance like bank loan etc., may be arrange .
nlYwever,
an 1. f cash shortage is expected on a regular basis then the long term sources of funds may
~ ; tapped.