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. are facilitated by the banks through Cash Budget financing plans. In such pattern of business dealings, the requirement of finance is not uniform throughout the year. The demand for financial assistance may be peak during some calendar months, in view of the realizations of sale proceeds take place at a length of time. However, in some months during the year these business enterprises are swollen with excess cash due to 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 on the basis of 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 lower ratio on the case-to-case basis depending upon components and quality of current assets and current liabilities. In exceptional cases, excess drawings is allowed up to 10% if the need is considered by the bank as genuine. However, it is mandatory for the borrower to submit the statement containing actual cash receipts and payments to the bank within a week from the end of previous month. Thus, this arrangement facilitates the banks not only to sanction the need based finance but also safeguards the end use of bank funds.

Illustration:

The pattern of calculation of 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 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.