Cash Budget pattern of financing

[Cash Budget pattern of financing seasonal productions like sugar, tea, and construction activities]

The request for financial assistance from business enterprises dealing in seasonal products like sugar, tea, construction activities, film industries, order-based activities, etc. is facilitated by the banks through Cash Budget financing plans. In such a pattern of business dealings, the requirement of finance is not uniform throughout the year. The demand for financial assistance may peak during some calendar months because the realization of sale proceeds takes place at a length of time. However, in some months during the year, these business enterprises are swollen with excess cash due to an increase in cash collection from debtors, as well as the seasonal increase in cash sales. The bank finance to such units will be therefore planned based on projected monthly cash flows estimated by the borrower and approved by the bank. The current ratio for this kind of facility is normally 1.33: 1 (1.25:1 for MSE) as a benchmark. Some Banks consider a lower ratio on a case-to-case basis depending upon the components and quality of current assets and current liabilities. In exceptional cases, excess drawings are allowed up to 10% if the need is considered by the bank as genuine. However, the borrower must submit the statement containing actual cash receipts and payments to the bank within a week from the end of the previous month. Thus, this arrangement facilitates the banks not only to sanction the need-based finance but also to safeguard the end use of bank funds.

Illustration:

The pattern of calculation of the working capital requirement of a unit is illustrated in the following chart.

(‘00000 omitted)

	April	May	Jun	July	Aug	Sept	Oct
A. Cash Receipts: Cash sales, Cash Collection from debtors	34	41	52	44	28	18	12
B. Cash Payments: Cash payment to trade creditors, office expenses, wages taxes etc.	22	31	56	62	65	29	22
C. Net Cash-flow (A-B)	12	10	(-) 4	(-)18	(-) 37	(-11)	(-) 10
D. Cash at start of month	6	18	28	24	6	5	5
E. Cumulative Cash (C+D)	18	28	24	6	(-) 31	(-)16	(-) 5
F. Minimum Balance required	5	5	5	5	5	5	5
G. Surplus(+)/Deficit(-) [E-F]	(+) 13	(+) 23	(+) 19	1	(-) 36	(-) 21	(-) 10
H. Limit/DP required	–	–	–	–	36	21	10

Note: The movement of cash is generally classified under the following three heads.

Cash flow from operating activities: The revenue generated from the principal activity of the company.
Cash flow from investing activities: Capital expenditure on purchase of tangible and intangible assets. The money received from the disposal of old machines, interest received on deposits, or from lending activities are included in cash flow from investing activities.
Cash flow from financing activities: Money received from issues of shares, bonds and debentures, repayments of the loan are examples of cash flow from financial activities.

UNDERSTANDING A CASH FLOW STATEMENT	UNDERSTANDING THE FUNDS FLOW STATEMENT
HOW TO ANALYSE A CASH FLOW STATEMENT?	FORMAT OF FUNDSFLOW STATEMENT AND ITS ANALYSIS EXPLAINED
CASH BUDGET PATTERN OF FINANCING	WHAT ARE CAPITAL BUDGETING AND CASH BUDGET SYSTEMS?