Page 132 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 8: Cash Planning

3. Collections of accounts receivable: After a base level of accounts receivable is established Notes
(based on sales projections), it must be adjusted to reflect the amount that will actually be
paid during the time period. Typical adjustments for a small business might be to assume
that 90 percent of accounts receivable will be collected in the quarter in which the sales
occur, 9 percent will be collected in the following quarter, and 1 percent will remain
uncollectible. Of course, past experience will be the most reliable indicator for making
these adjustments.
4. Other income: Your cash position may be affected positively by income other than that
received from sales. Perhaps there are investments, dividends, or an expected borrowing
that will be introducing cash to the company during the time period. These types of cash
sources are referred to as “other income.”

Expected Cash Expenses

1. Raw material (inventory): For small business retailers and manufacturers, the largest
cash expense is usually the amount spent for inventory or raw materials. Again, past
experience will be your best indicator of future cash outlays. But don’t forget to factor in
any necessary increases to keep up with projected sales. You may also want to consult with
your suppliers as to whether any pricing changes are expected.

2. Payroll: Salaries are commonly the second largest expense item during an accounting
period. Don’t forget to include estimates for all appropriate local, state, and federal taxes.

Other Direct Expenses

Use this line item for any additional expense that does not fit conveniently under the other
headings. If you are making payments on a loan, include it here.
1. Advertising: The role of advertising varies by type of business. If you are projecting an
increase in sales, is there an accompanying marketing or advertising campaign? These
costs must be budgeted. Include any expenses for print (brochures, mailers, and newspaper
ads), radio, or other advertising services.

2. Selling expenses: Typical selling expenses include salaries and commissions for sales
personnel and sales office expenses. However, this line item can also include any traveling
or other sales-related expense not covered elsewhere.
3. Administrative expense: General office expenses are included here. This will include your
utilities, telephone, copying and day-to-day office expenses. Unless big changes are
underway, past experience will guide you in evaluating future administrative expenses.
4. Plant and equipment expenditures: Cash payments for equipment loans, mortgages, repairs,
or other upkeep should be included here. Past experience will, again, be your guide.
5. Other payments: If there are any cash payments you expect to make that are not covered
in the above listing, include them here. (If they are repeatable, you may consider adding
a separate line item.) However, typically, interest payments and taxes fall here.

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