Coping with Uncertainty in the Cash Budget

One way to cope with cash budgeting uncertainty is to prepare several cash budgets based on several forecasted scenarios (e.g., pessimistic, most likely, optimistic). From this range of cash flows, the financial manager can determine the amount of financing necessary to cover the most adverse situation.

This method will also provide a sense of the riskiness of alternatives.

An example of this sort of sensitivity analysis for Coulson Industries is shown on the following slide.

Please read the "COPING WITH UNCERTAINTY IN THE CASH BUDGET topic in your book on pages 133-134 before solving this question. Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500.000 per month. The firm will make purchases of $350,000 per month during these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The firm must make a principal and interest payment on an outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of $20,000 is also due in June. All sales are for cash. (a) Construct a cash budget for June, July, and August, assuming the firm has a beginning cash balance of $100,000 in June. The sales projections may not be accurate due to the lack of experience by a newly- hired sales manager. If the sales manager believes the most optimistic and pessimistic estimates of sales are $600,000 and $400,000, respectively, what are the monthly net cash flows and required financing or excess cash balances? Make your recommendations. (b)