Page 128 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 8: Cash Planning

8.1 Objectives of Cash Planning Notes

Cash planning has three main objectives:
1. To ensure that expenditures are smoothly financed during the year, so as to minimize
borrowing costs;
2. To enable the initial budget policy targets, especially the surplus or deficit, to be met; and
3. To contribute to the smooth implementation of the policy as laid by the management.

An effective cash planning and management system should:
1. Recognize the time value and the opportunity cost of cash;
2. Enable line ministries to plan expenditure effectively;
3. Be forward-looking – anticipating macroeconomic developments while accommodating
significant economic changes and minimizing the adverse effects on budget execution;
4. Be responsive to the cash needs of various departments;
5. Be comprehensive, covering all inflows of cash resources; and
6. Plan for the liquidation of both short- and long-term cash liabilities.

Even if a budget is realistic in the sense of having well-prepared and objective aggregate revenue
and expenditure estimates, this does not mean that budget execution will be smooth. Timing
problems can be expected between payments coming due and the availability of the cash necessary
to discharge them.

Ideally, a cash plan for a centralized organization should include, for the month ahead, a daily
forecast of cash outflows and cash inflows.
Fast growing organisations should aim to deliver their budget by adopting a monthly cash
plan, based on projected aggregate cash inflows and limits on cash outflows. The principal
components should be as follows:
1. The starting point should be an annual cash plan, prepared in advance of the fiscal year,
setting out projected cash inflows and cash outflows month by month.
2. Past patterns can help establish likely month-to-month inflows of revenue receipts. The
likely timing of borrowing is also often partly known in advance, so that total inflows can
be projected. Past patterns of expenditures can usually be a guide to the cash outflows each
month.
3. However, factors such as irregular capital expenditure patterns, variations in the timing
of cash receipts and the precise timing of new borrowing (which may have to await a
conjunction of beneficial market conditions) are likely to mean variation from year to
year in monthly patterns of cash inflows and outflows.
4. When it appears from the initial projections that there might not be enough cash available
within a given month to cover expenditures falling due, a firm can delay the planned
commitment of the expenditure; speed up the collection of revenue; or borrow. The choice
among the three options will depend on feasibility and costs.
Once the annual plan is established, it should become the basis for rolling three-month projections,
and within that projection an operational cash management plans for the month ahead. These
should operate as follows:
1. The three-month projections and monthly plans need to be revised each month on a rolling
basis in the light of actual revenues and expenditures (and often experience in borrowing).

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