Cash budget

The cash budget is considered the primary forecasting tool when firms try to estimate their cash flows and figure out if they are likely to need additional cash flows or to generate surplus cash.

Consider the case of Mooney Equipment:

Mooney Equipment is putting together its cash budget for the following year and has forecasted expected cash collections over the next five quarters (one year plus the first quarter of the next year). The cash collection estimates are based on sales projections and expected collection of receivables. The sales and cash collection estimates are shown in the following table (in millions of dollars):

	Q1	Q2	Q3	Q4	Q5
Sales	$1,210	$1,510	$1,560	$1,360	$1,610
Total cash collections	$1,210	$1,260	$1,310	$1,310

You also have the following information about Mooney Equipment:

	In any given period, Mooneys purchases from suppliers generally account for 78% of the expected sales in the next period, and wages, supplies, and taxes are expected to be 15% of next periods sales.
	In the third quarter, Mooney expects to expand one of its plants, which will require an additional $1,078 million investment.
	Every quarter, Mooney pays $55 million in interest and dividend payments to long-term debt and equity investors.
	Mooney prefers to keep a minimum target cash balance of at least $16 million at all times.

Using the preceding information, answer the following questions: (Note: Round your answers to the nearest millionth dollar.)

What is the net cash inflow that Mooney expects in the fourth quarter (Q4)? a. -$243 million b. -$246 millon c. -$1088 million d. -$250 million
If Mooney is beginning this year with a cash balance of $39 million and expects to maintain a minimum target cash balance of at least $16 million, what will be its likely cash balance at the end of the year (after Q4)? a. -$457 million b. -$1545 million c. -$1788 million d. -$211 million
What is the maximum investable funds that the firm expects to have in the next year? a. -$193 million b. -$114 million c. -$159 million d. -$227 million
What is the largest cash deficit that the firm expects to suffer in the next year? a. -$902 million b. -$1263 million c. -$1082 million d. -$1804 million

True or False: If a firm changes its credit policy and allows customers to pay in 90 days instead of 60 days, and everything else remains the same, the net cash flow in the next quarter is likely to decrease.

a. True

b. False