Managerial Finance of Sungsun Company - Report Example

Introduction: Cash refers to the funds held by a firm that can be used for immediate payment of expenses. Since cash is a non-earning asset, it is essential to invest cash to get some return. Hence it is extremely essential for a firm to manage the amount of cash it has in hand and plan its future inflow and outflow of cash. For this purpose, cash budget is prepared by a company since cash budget is an extremely important tool used by financial managers for managing cash. A cash budget is a schedule that shows cash receipts, cash disbursements, and cash balances over a specific period of time. (Besley and Brigham 2000). If the cash budget shows that a firm has excess cash it needs to pay its short term debts that excess cash can be invested and interest or dividend income can be earned. On the other hand, if the cash budget shows more cash disbursements and less cash inflow, the deficit has to be covered by borrowing the shortfall of cash to pay short term expenses (Daft 2003). The following report is aimed at analyzing the budgeting process and includes the cash budget of Sungsun Company as it is important for a company to know about its future cash balances. It is essential for a firm to determine the amount of cash in hand it should have at any time to ensure smooth business operations is uninterrupted. The following is the budgeting process that is used to make the cash budget Sungsun Company. Budgeting Process: The disbursement and receipts or scheduling method is used to make the cash budget. Each months cash disbursements and cash receipts are estimated and then the net cash flow is determined by subtracting cash disbursements from cash receipts. Negative net cash flow indicates there is an outflow of cash and positive net cash flow indicates that there is an inflow of cash. Sungsuns cash receipts include payment receipt from debtors and disbursements include payment to creditors and payment of wages, administrative expenses and taxes. Budgeted sales are calculated keeping in mind seasonal fluctuations and other factors. Payment to creditors and debtors and administration expenses are budgeted keeping in mind the previous trends. The cash inflows and cash outflows in each month are then calculated and subtracted to obtain the net budgeted cashflow of each month. Cash Budget of Sungsun Company for the second quarter: Importance of cash budget: Cash budget is an extremely important component for proper management of cash for a rapidly expanding company such as Sungsun Company. It helps in planning investment and borrowing strategies for the efficient use of cash which is extremely important for an expanding company as it needs to borrow money to meet its expansion objectives. Due to planning, Sungsun Company will come to know if it will face cash deficiency or surplus and hence it can prepare before hand to invest if there is surplus and to borrow if there is deficiency without any threat to its liquidity (Master of business administration notes 2008). Due to proper cash management, a firm preserves its strong credit rating and this enables the firm to purchase goods on credit on favorable terms and banks are also willing to lend long term loans to the company and a rapidly expanding company needs lots of funds which it has to borrow and a strong credit rating helps in this long term borrowing. Cash budget also provides feedback to the company and it can improve its efficiency of the use of cash using that feedback. This helps in efficient management of cash as the company has more control on the use of cash and it can identify expenses that consume most of the cash and can take measures to reduce those expenses. Cash budget also acts as standard for measuring the financial performance of Sungsun Company. If there is net cash inflow, it indicates that Sungsun company has a good liquidity position and hence a good financial standing. Hence it is extremely important for Sungsun Company to maintain a monthly cash budget and manage its cash resources in an efficient manner to meet its expansion objectives. Conclusion: Sungsun Company has a lot of cash which is invested in the 2nd quarter and this means Sungsun Company has a strong liquidity position. This could be due to the efficient collection of cash from the debtors and high sales of Sungsun Company and should be maintained in the future. However, there are lots of fluctuations and uncertainties involved in businesses and the estimates of cash receipts and cash disbursements on a long term basis. Moreover, flexibility should be shown when implementing the cash budget since rigidity in the implementation of cash budget would lead to unfavorable consequences such as losing valuable customers. It is also extremely important that the management implements the cash budget otherwise the actual figures would not conform to the estimated figures of cash inflow and cash outflow. Hence steps should be taken for the proper implemention of the cash budget by Sungsun Company. Workings: (W-1) Payment to creditors feb mar apr may june Total Raw material needed for the month 855,000 900,000 990,000 1,080,000 1,305,000 3,375,000 Raw material received for the next month 630,000 693,000 756,000 913,500 929,250 2,598,750 Raw material received for this month 256,500 270,000 297,000 324,000 391,500 1,012,500 Total raw materials received in the month 886,500 963,000 1,053,000 1,237,500 1,320,750 3,611,250 cash paid to creditors after 2 mnths 221,625 240,750 263,250 725,625 cash paid to creditors after 1 mnths 722,250 789,750 928,125 2,440,125 total payment to creditors in the month 943,875 1,030,500 1,191,375 3,165,750 Depreciation is a non cash expenses hence is not included in the cash budget. Wages= 15% of each months sales Amount invested= cashflow of the month – 50,000 Monthly Administration expenses= administration expenses (excluding depreciation and property tax) ÷ 12 Reference Besley and Brigham 2000. Besley, S. and Brigham, E.F., 2000. Essentials of managerial finance, 12th ed., South-Western College. Daft, R.L, 2000. Management, 6th ed., Vanderbilt University. Master of business administration notes. 2008. Functions or importance of cash budget [Online] (Updated 2008) Available at: http://www.freemba.in/articlesread.php?artcode=369&stcode=10&substcode=23 [Accessed 18 July 2010]. Read More