There are usually three horizons of cash forecasts each with specific objectives: the annual cash budget (BAT), the rolling cash forecast, the forecasts of a few days in value dates. We suggest you to take an interest in this post to the annual cash budget, its usefulness and its main stages of construction.
The treasurer must master the art of forecasting because most cash decisions are made on the basis of projected flows or balances: borrowing, investment, hedging of foreign exchange or interest rate risk. In addition, to ensure the liquidity of the company, it is incumbent on it to anticipate a possible deterioration of the cash flow.
The Usefulness of the Annual Cash Budget
The budget horizon is 12 months, in principle modeled on the accounting year. The flows are accumulated and the cash position is set to a monthly interval. The cash position is in principle calculated at the end of the month. However, if the company has a maximum cash flow requirement at another date in the month, it is best to calculate cash on that date. If, for example, all suppliers are paid on the 10th of each month, it is this need for cash that should be estimated. It is mainly used to evaluate the need for short-term financing in the following year to allow the negotiation of the CT credit lines necessary for the proper functioning of the company with all the banks.
The presentation of a budget is likely to reassure the banking partners as to the destination of the CT financing (it is not asked to finance losses!) and the fact that the company masters the evolution of its need for cash. The BAT is therefore often less useful for the company with excess cash, unless it is the subsidiary of a group and the parent wants to measure the amount of surplus that can be “reassembled”. It is also useful for cash-flow businesses with relatively long maturities of several months to set the optimal investment renewal dates.
The TAO is normally preceded by an MT financing plan updated by the CFO which is used to implement MT’s financing decisions. The horizon of the MT financing plan is often between 3 and 5 years, the cumulative flow interval is annual. BAT is the short-term part of this financing plan. In particular, it makes it possible to verify that the financing decisions taken at the level of the financing plan lead to a balanced cash position. For example, if the treasurer detects in his budget a cash flow caused by the self-financing of an investment, he can suggest to the chief financial officer the establishment of a financing to MT.
The TAO is also used to calculate the CT financial costs or income in order to finalize the income statement.
Finally, BAT is often in the business creation plan for the first or first two years of the plan. At the start-up stage, the company often needs a particularly large cash flow because it has to pay for fixed charges while the first customers do not come immediately.
Build the Annual Cash Budget
The Preparatory table to Reconstitute Cash Flows
Cash flow being the result of all flows, this budget has the particularity of being the last to be achieved in the budget process; it comes at the end of the chain.
There are three categories of upstream budgets:
- operating budgets: sales, purchases, staff costs;
- the investment budget, which is often less known than the actual date of implementation;
- The MLT financing budget which groups all the flows relating to the financing at MLT.
The treasurer of a company wishing to establish a cash budget in the absence of a budget process should start by establishing a profit and loss account and define the seasonality coefficients of the sales.
The development of the BAT is based on two main treatments carried out in a preparatory table: converting the posting date movements into payment dates and calculating the monthly disbursement of VAT.
The BAT only traces receipts and disbursements to arrive at the end of month cash position. Convert posting date movements to flow dates is often unusual for a person with an accounting or management controller profile. Thus, it is a question of converting monthly forecasts of sales HT in anticipation of receipts TTC. For this, it is advisable to define statistical laws of bursting sales in receipts and purchases in disbursements. In order to construct this bursting law, it is of course necessary to take into account deadlines actually recorded and not the time limit set in the general conditions of sale or even those negotiated with customers. It can be unique for all customers of the company or modulated by category of customers, by country, it is reviewed annually.
The treasurer of a company wishing to establish a cash budget in the absence of a budget process should start by establishing a profit and loss account and define the seasonality coefficients of the sales.
The development of the BAT is based on two main treatments carried out in a preparatory table: converting the posting date movements into payment dates and calculating the monthly disbursement of VAT.
The BAT only traces receipts and disbursements to arrive at the end of month cash position. Convert posting date movements to flow dates is often unusual for a person with an accounting or management controller profile. Thus, it is a question of converting monthly forecasts of sales HT in anticipation of receipts TTC. For this, it is advisable to define statistical laws of bursting sales in receipts and purchases in disbursements. In order to construct this bursting law, it is of course necessary to take into account deadlines actually recorded and not the time limit set in the general conditions of sale or even those negotiated with customers. It can be unique for all customers of the company or modulated by category of customers, by country, it is reviewed annually.
The second treatment is to calculate the monthly disbursement (or credit) of VAT. This calculation is of interest only to the treasurer, the operating and investment budgets being always realized HT. If he performs the BAT on spreadsheet, the treasurer will be careful to set the formulas to automatically manage the VAT credits carry forward to the next month.
Overcome the Pitfalls of Operating Budgets
The treasurer who makes the BAT for the first time will be vigilant to detect a certain number of potential pitfalls, for example, subscriber charges: certain charges disbursed at a fixed moment in the year are smoothed by twelfth in the operating budgets: insurance premium, taxes, quarterly rent, it is obviously necessary to return to the flow actually disbursed. Avoid calculating VAT on export sales, do not confuse the purchase budget with that of consumption of raw materials in case of large inventory changes, are all pitfalls to avoid.
The Presentation of the BAT
The treasurer must define an optimum level of data aggregation. Two approaches make it possible to calculate the monthly change in cash flow.
The first and most used approach is to calculate the monthly change in cash that is determined directly by cash inflows and outflows. The second approach is more rarely used, consists in calculating the monthly variation of cash from the variation of the working capital and the working capital requirement. This presentation framework is certainly more complex to develop but much more explanatory of cash flow variations. The annual cash budget is useful for assessing the need for CT funding over the next year. Although it is being revised mid-year, it remains a fixed forecast.
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