4.2 Proforma Income Statement.

Preparation of the proforma income statement

The most commonly used and simplest technique for preparing the pro forma Income Statement is the
Percentage Method on Sales. It consists of estimating sales in order to then establish the cost.
of goods sold, operating costs and interest expenses, etc., all in percentage form
of the projected sales. The percentages used are to estimate the income statements.
they are the sales percentages of these lines in the immediate previous year and it is assumed that the
Costs and expenses estimated to prepare the pro forma income statement vary with sales.
Just like for the cash budget, the key input for the Financial Statements
Budgeted is the sales forecast and the financial statements of previous years.

Percentage method on sales.

It is desired to estimate the pro forma income statement for 20X1, given that the State of
Results for 20X0 and the estimated sales for 20X1 which are $135,000

Income Statement 20X0

Sales $100,000

Cost of goods sold 80,000

Gross Profit $20,000

Operating expenses 10,000

Operating profit $10,000

Interest Expenses 1,000

Profit before taxes $9,000

Taxes 40% (ISR and PTU) 3,600

Net profit $5,400

Dividends for shareholders $3,000

Retained earnings $2,400

Pronósticos de ventas para el 20X1 = $135,000

Cost of goods sold / Sales = 80,000/100,000 = .80 (80%)

Operating expenses / Sales = 10,000 / 100,000 = .10 (10%)

Interest expenses / Sales = 1,000 / 100,000 = .01 (1%)

Budgeted Income Statement

Sales $135,000

Cost of goods sold (.80 X 135,000) 108,000

Gross Profit $27,000

 Operating expenses ( .10 X 135,000) 13,500

Operating profit $13,500

Interest Expenses (.01 X 135,000) 1,350

Profit before tax $12,150

Taxes 4,860

Net profit $7,290

Dividends for shareholders 3,000

Retained earnings 4,290

Budgeted income statement method

This method consists of taking the estimated income statement for the next period and adding
or reduce the profit the items that affect the cash position and are not included as
sales or expenses.
The items included in the income statement that do not involve cash movement are the
depreciations and amortizations.
The items not included in the income statement that affect the cash flow statement.
They are mainly investments in fixed assets or working capital, dividends payable, the
loans that are expected to be obtained, capital contributions, etc.

An easy way to calculate working capital needs for the next year is to determine
the relationship of working capital to sales. This relationship will inform about new investments
what should be done for that purpose. For example, if selling $40,000 requires investing
$2,000 in cash, $8,000 in receivables, and $4,000 in inventory but $4,000 can be financed with the
suppliers, it can be assumed that for each peso increase in sales, a ...
Investment of $0.25 in working capital ($2,000 + $8,000 + $4,000 + $4,000) = $10,000/$40,000. If
It is estimated to sell $50,000 in the next period, an additional investment of $2,500 needs to be calculated.
in capital in work (the $0.25 of the 10,000 increase in sales).
 Example of the Projected Income Statement Method

Example of the budgeted income statement method

Projected income statement method

Utility $15000
Adjustments to the utility
Depreciation 10000
Investment in capital in labor:
Cash $3000
Clients 13400
Inventory 10000
Suppliers 6700 (19700)
Investments in non-current assets:
Machinery 20000
Payment of liability:

Mortgage payable 10000

Missing $24,700

4.3 Proforma Balance Sheet.

Preparation of the proforma balance sheet
There are several shortcuts to prepare the pro forma balance sheet, but the best,
The simplest and most widely used method is the estimation calculation method.
According to this method, the values of certain accounts in the balance sheet are estimated, in
so much that others are calculated. When this method is applied, the external financing of the
Company is used as a break-even figure.
In addition to the previous year's balance sheet, some additional assumptions are required in order to
apply this method. Below is an example:

Balance sheet 20X0

Active Passive
Circulating Circulating
Box $6,000 Accounts payable $7,000
Negotiable Values 4,000 Taxes payable 300
Accounts Receivable 13,000 Documents payables 8,300
Inventories 16,000 $39,000 Other short-term liabilities 3,400 $19,000
Fixed Asset 51,000 Long-term liabilities 18,000 $37,000
Equity capital
Common Actions $30,000
Retained Earnings 23,000 $53,000
Total Assets $90,000 Total of Liabilities plus Equity $90,000

Additional Data:
A minimum cash balance of $6,000 is required.
2. It is assumed that the negotiable values will remain unchanged from their current level.
$4,000.
3. Accounts receivable will average 45 days of sales.
The company's annual sales are projected to be $135,000, accounts receivable for
They should charge an average of $16,875 0/8 x $1,350.00) (45 days are equivalent to one eighth of a
year: 45/360=1/8).
4. The ending inventory must remain at a level of approximately $16,000, of which
25% (around $4,000) must be raw materials, while the remaining 75%
(around $12,000) should consist of finished goods.
5. A new machine will be purchased that costs $20,000. The total depreciation for the year will be
of $8,000. If the acquisition of $20,000 is added to the existing fixed assets of $51,000 and
After subtracting the depreciation of $8,000, the net fixed assets amount to $63,000.
6. Purchases are expected to constitute approximately 30% of annual sales.
which in this case should be around $40,500 (0.30 x $135,000): the company estimates
will take an average of 72 days to settle their accounts payable. Therefore, these
equivalent to one-fifth (72 days / 360 days) of the company's purchases, that is $8,100
(1/5 x $40,500)
7. It is expected that taxes payable will amount to one quarter of the tax debt.
year, which is equal to $1,215 (a quarter of the tax debt of $4,860 shown in the state
of proforma result.
8. It is assumed that accounts payable will remain unchanged at their current level of
$8,300.
9. No changes are expected in the other short-term liabilities. They will remain at the level of
previous year: $3,400.
10. The company's long-term liabilities and its common stock do not experience any
exchange, $18,000 and $30,000 respectively, since no emissions, withdrawals or
purchase of bonds or shares.
11. Retained earnings will increase from the initial level of $23,000 (according to the
balance sheet as of December 31, 20X0, at $27,290. The increase of $4,290 represents
the amount of retained earnings calculated in the pro forma income statement at the end of
2012.
 12. The proforma balance sheet for 20X1 for the company contains a break-even figure -
Called here, external funds required - $9,570 is needed in order to achieve the balance
of the financial state.
That is to say, the company will have to obtain this same amount for additional external financing.
and thus withstand the increase of $135,000 in the sales level for 20X1.
When this method is used, in certain circumstances, it could result in a negative requirement.
of external funds, which indicates that the company's financing exceeds its needs. The
funds, therefore, will be available to pay the debt, buy shares or to increase the
dividends of shareholders.
Analysts sometimes use the calculation-estimation method in the preparation of pro forma.
as a technique to calculate financing needs.

Balance sheet 20X1

Active Passive
Circulating Circulating
Box $6,000 Accounts payable $8,100
NegotiableValues 4,000 Taxes payable 1,215
Accounts Receivable 16,875 Documents payable 8,300
Inventories 16,000 $42,875 Other current liabilities 3,400 $21,015
Fixed Asset 63,000 Long-term liabilities $18,000
External funds required 9,570 27,570 $48,585
Equity capital
Common Actions $30,000
Retained Earnings $27,290 $57,290
Total Assets $105,875 Total Liabilities and Equity $105,875

Projected balance method.

This method consists of preparing a cash flow statement through the comparison between a
current year balance sheet and another forecasted for the following period. The technique is very
varies and changes in every circumstance. However, it can be elaborated as follows:

1. Determine the profit or loss for the next period by preparing a statement of losses and
budgeted earnings. This statement can be prepared with all the budgeting techniques or just
forecast sales, and based on that estimate and the overall expense percentages (with sales at 100%)
determine the profit (remember the concept of fixed and variable costs).
2. Estimate through rotations the figures of the items that comprise working capital: accounts receivable or
customers, accounts payable or suppliers and inventories. For example, assuming that the average period of
billing to clients should be for three months and the estimated sales should be $200,000. The estimated balance of accounts
For amounts receivable from customers, it will be calculated as follows: the average installment sale of three months implies that
with the investment in accounts receivable, the portfolio experiences turnover four times a year (12/3). If sales are expected
$200,000 should have $50,000 in clients, approximately (200,000/4).
The same reasoning will be applied to inventory and accounts payable items.
suppliers, which results in these balances.
3. Estimate the amounts of fixed assets based on current figures and new investment projects.
Also, consider the increase in accumulated depreciations due to the passage of time.
4. Also adjust the liabilities and equity accounts, according to agreed loans or new issues of
capital, or by payments that must be made during this period.
5. Present a balance sheet with the obtained data. This balance, of course, will not yield the same result.
If the liabilities and equity section is greater than that of assets, it indicates that there is a surplus and, therefore,
this excess must be added to cash. If, on the contrary, the assets section is greater than the liabilities section and
In conclusion, there is a lack of a source and, for that reason, there is a cash shortfall.
The determination of a cash shortfall or surplus is very important; nevertheless,
it is advisable to present the cash budget formally. Hence, the last step is
the following.
 6. The presentation of the cash budget. Before discussing the formal presentation of this statement, it is clarified
that the data were obtained by comparing the two balance sheets, in a manner similar to the
determination of a cash flow state. It is advisable to even show the sources of income from
cash and its applications. The following table presents a scheme of the methodology used.

Illustration of the Projected Balance Sheet Method

to prepare the cash budget
Information Financial statements of the period Policies of
additional anterior Inventories,
wallet
suppliers

Income Statement
projected
Projected balance sheet
(determination of the balance in
cash by differential

Projected Cash Flow Statement

Example of the Projected Balance Method.

Creative Constructions, Inc.

Balance Sheet as of December 31, 20X0
Assets: Liabilities:
Circulating: In the short term:
Cash $9,000 Suppliers $20,000
Clients 40,000 In the long term:
Inventories 30,000 $79,000 Mortgage Payable 30,000 $50,000
Non-current assets: Equity capital:
Machinery $50,000 Capital contributed $40,000
Accumulated depreciation 10,000 40,000 Capital gains 29,000 69,000
Total assets $119,000 Liabilities plus equity $119,000

Creative Constructions, Inc.

Statement of Results 20X0 Budgeted 20X1
Sales $180,000 $240,000
Less: Cost of goods sold 120,000 160,000
Gross profit 60,000 80,000
Less: Operating expenses 40,000 50,000
Profit before income tax and profit sharing. 20,000 30,000
Less: Income Tax and Profit Sharing 10,000 15,000
Net utility $10,000 $15,000

Additional information:
$10,000
 A machine was purchased for $20,000.
c) The cash balance is 5% of sales
A payment of $10,000 was made on the mortgage loan.

Creative Constructions, S. A.
Balance Sheet as of December 31, 20X0
Assets: Liabilities:
Circulating: In the short term:
Cash $12,000 Suppliers $26,700
Clients 53,400 In the long term:
Inventories 40,000 $105,400 Mortgage payable 20,000 $46,700
Non-current: Equity capital:
Machinery $70,000 Capital contributed $40,000
Accumulated depreciation 20,000 $50,000 Capital earned 44,000 $84,000
Total assets $155,400 Liabilities plus equity 130,700
Missing 24,700

Budgeted Balance Sheet or Statement of Financial Position.

Short-term planning is the design of actions aimed at changing the company in the way that it
has been defined. That design of activities, when it refers to the master budget, must be aimed at
to achieve a convenient situation for the company during that period, which can be reflected through
the preparation of the budgeted financial statements, which will serve as a guide during the considered period.
From the above, the importance of carefully preparing the projected financial statements is inferred, because
they will be the reference point for the entire organization.
When analyzing how the budgeted income statement is prepared, it was observed that it is practically the
integration of the different budgets that make up the operating budget. Now the
methodology for preparing the budgeted balance sheet or financial position statement, that is, how to determine
each item of the balance sheet:

1.- Current assets

CashThe amount is obtained from the cash budget when the final balance has been determined.
through rotations or another established policy.
Clients This balance is obtained in the following way: initial accounts receivable plus credit sales.
of the budget period less collections made during the same period. Another methodology is
make the rotation that is expected of that game.
Inventories The balance of raw material and finished goods inventories is obtained from
inventory budget, which was determined in the development of the operating budget.
It can also be done according to the rotation that both items are expected to have.
Temporary investments The balance depends on the existence of increases or decreases, adding them
or subtracting them, respectively, from the balance that was at the beginning of the budget period.

2.- Non-current assets

Depending on the asset in question, the initial balance is increased by the corresponding amount for the new ones.
acquisitions and the corresponding sales of that asset are deducted. The same procedure should be applied.
for the accumulated depreciation of that asset.

3.- Short-term liabilities

Suppliers are determined as follows: the initial balance of suppliers is added to the total of
purchases made during the budget period, and from this result, the payments made are subtracted
during that period. It is also possible to determine it through the expected rotation.
Other current liabilities According to the conditions established for each one (tax on the
rent payable, documents payable, etc.
[Link]-term liabilities
In relation to other liabilities, both short and long-term, the initial amount is increased, if it is
new liabilities were produced, or it is deducted, if the total or part of them was paid.

5. Equity
Contributed capital This amount that appears in the initial balance is only modified if there were new
contributions from shareholders or withdrawals.
Capital gained The initial balance is increased by the profits of the budget period, which
they are obtained from the budgeted income statement; if there are losses, it is subtracted from the initial balance of
retained earnings, just like if dividends were declared.

Example:
The company SISI, SA, presents the following information to prepare its financial position statement.
budgeted for 20X1:
During the budget period of 20X1, sales of $51,000 will be collected; credit sales will amount to $60,000.
Payments to suppliers in 20X1 will be $34,500; credit purchases during 20X1 will amount to $40,000.
Machinery will be acquired for $20,000; the annual depreciation expense will be $10,000.
Las cédulas de inventario arrojan las siguientes cifras: materia prima, $5,000; artículos terminados, $8,500.
They will pay $10,000 of the mortgage.
The budgeted profit for 20X1 is $3,200.
The cash balance indicates that the cash budget is $1,200.
New contributions were made by the shareholders for $15,000.

SISI Company, S. A.
Balance sheet as of December 31, 20X0
Assets: Liabilities:
Circulating: In the short term:
Cash $1,000 Suppliers $3,000
Clients 4,000 In the long term:
Raw material 3,000 Mortgage payable 30,000
Finished articles 16,000 24,000 Total Liabilities $33,000
Non-current assets: Equity capital
Machinery and installations $70,000 Contributed capital 35,000
Accumulated depreciation 20,000 $50,000 Capital earned 6,000 41,000
Total assets $74,000 Liabilities plus equity $74,000

SISI Company, S. A.
Balance sheet as of December 31, 20X0
Assets: Liabilities:
Circulating: In the short term:
Cash $1,200 Suppliers $8,500
Customers 13,000 In the long term:
Raw material 5,000 Mortgage payable 20,000
Finished articles 8,500 24,000 Total Liabilities $28,500
Non-circulating: Equity
Machinery and facilities $90,000 Capital contributed 50,000
Accumulated depreciation 30,000 $60,000 Earned Capital 9,200 59,200
Total assets $87,700 Liabilities plus equity $87,700

$4,000 + $60,000 = $64,000 - $51,000 = $13,000

$30,000 + $40,000 = $43,000 - $34,500 = $8,500
$70,000 + $20,000 = $90,000
$20,000 + $10,000 = $30,000
 $20,000
$35,000 + $15,000 = $50,000
g.$6,000 + $3,200 = $9,200

Another example of carrying out the Projected Balance Sheet Method.

Example:
If a company needs to know the amount of cash required for a specific moment,
and by reinvesting this cash into the business what will be its internal resource generation, and if this is
sufficient to meet its internal commitments without the need to resort to external sources,
it will necessarily have to resort to the use of financial forecasts and among them, the most applied
it is the method of the projected balance sheet. This process begins with the sales forecast, the
which, as already explained, can be done using different methods. The following example
it will show the whole process of the Projected Balance Sheet method.

Suppose that the Financial Manager of a manufacturing company has the following data
historical

Potential capacity 2,000

Used capacity 70%
Units produced and sold 1,400
Purchase of materials per unit produced $5,000
Direct labor per unit produced $900
Variable costs per unit produced $800
Sale price per unit $19,500
Selling expenses per unit sold $2,925

Sales and Purchase Policy.

The company manager asks their Financial Manager to calculate what the state of the company will be.
X, S. A. at the end of the following period if the business reaches 100% of the installed capacity
without the need to cause an increase in prices. It is also specified that for the value of the
Purchase of materials requires a 5% financing payment on 20% of the total materials.
purchased. Will the company be able to financially support that sales projection?
As a first step, the Financial Manager requests the financial statements for the period.
immediately prior, the budgets (this tool contains estimates of future
receipts and expenses for different activities, shows the flow of income and cash outflows at
just like purchases or acquisitions of assets).

The income statement of the company for the immediately preceding period is as follows:
 Company X, S. A.
Income Statement as of December 31, 20X0
Sales $27,300,000

Variable costs 9,380,000

Variable expenses 4,095,000

Contribution Margin $13,825,000

Fixed Costs 6,100,000

Fixed expenses 4,700,000

Operating income $3,025,000

Interests 2,174,250

Profit before tax $850,750

Taxes 40% 340,300

Net profit $510,450

It is known that the number of shares is 10,000 and that the company retains earnings.
Variable costs and expenses correspond to 34.36% and 15% of sales.
respectively. The contribution margin represents 50.64% of sales and the directives of
the company believes that this percentage is ideal. The Financial Manager knows in advance that
Any increase in sales results in an increase in variable costs and expenses equally.
proportion.

For the purposes of starting the exercise, the Financial Manager determines the most important variables.
for the projection. These are the results prepared by the G. F.

Historical Projected Variation

Potential capacity 2,000 2,000

Used capacity 70% 100% 42.86%

Units produced and sold 1,400 2,000 42.86%

Purchase of materials per unit produced $5,000 $5,000

Direct Labor per unit produced $900 $4,900

Variable costs per unit produced $800 $800

Selling price per unit $19,500 $19,500

Selling expenses per unit sold $2,925 $2,925

Financing Policies
Based on this data, the Financial Manager determines the income statement taking into account
that debts with third parties will not have payments or amortizations and that the suppliers account
corresponds to the financing that the company has for purchasing on credit 20% of the total of the
materials with a financing cost of 5%.
The following is the projected income statement:

Company X, S. A.
Income Statement as of December 31
Historical (201X0) Projected (20X1)
Sales $27,300,000 39,000,000

Variable costs 9,380,000 13,400,000

Variable costs 4,095,000 5,850,000

Contribution Margin $13,825,000 19,750,000

Fixed Costs 6,100,000 6,100,000

Fixed expenses 4,700,000 4,700,000

Operating profit 3,025,000 8,950,000

Interests 2,174,250 2,174,250

Profit before tax $850,750 6,775,750

Taxes 40% 340,300 2,710,300

Net profit $510,450 4,065,450

Analysis process

As can be observed, sales increase by 42.86% as a result of an increase in the

production also of 42.86%. For its part, variable costs and expenses also suffer that
increase, demonstrating that an increase in sales caused by an increase
in production involves the same increase in variable costs and expenses as they depend
directly from production the first ones and from sales the second ones.
Fixed costs and expenses do not undergo any variation due to their fixed nature. Since there was no
increase in property, plant, and equipment, these remain constant just like the expenses
financial. Remember that it was adopted as a credit policy not to make any payments towards capital. To
perform a vertical analysis of the income statement, it can be noted that variable costs and expenses
together with the contribution margin, in relation to sales, they do not suffer any modifications, that is,
it remains at 34.36%, 15%, and 50.64% respectively. Likewise, the operating profit has a
quite positive behavior, grows by 195.87% as a result of making the most possible use of
installed capacity. As a final result, net profits grow by 696.44% as a result of a
increase in sales of 42.86%.

Preparation of the projected Balance Sheet.

Before making the forecast, the balance sheet of the company for the last period will be presented.
accountable.

Active Base Year

Current or circulating
 Box $957,250

Accounts Receivable 16,380,000

Raw Material 4,500,000

Total Currents $21,837,250

Fixed

Team 3,500,000

Buildings 25,000,000

Machinery 18,000,000

Depreciation -6,800,000

Net fixed total $39,700,000

Total Assets $61,537,250

Passive

Short-term current

Short-term Obligations 5,000,000

Suppliers 70,000

Overdraft 4,500,000

Labor Liability 416,500

Taxes 340,300

Total current liabilities 10,326,800

Long Term

Long-Term Obligations 35,700,000

Total long-term liabilities 35,700,000

Total liabilities 46,026,800

Equity Capital

Benefits of exercise 510,450

Common capital 15,000,000

Total equity 15,510,450

Total Liabilities and Equity 61,537,250

Observations to keep in mind

To achieve the projected balance, it is necessary to take into account the amounts of cash and accounts
Accounts receivable has a growth equal to that of sales (42.86%) as they directly depend on them.
The same can happen with the inventory account; however, for this exercise, it is assumed that the
The company consumes the total purchase of raw materials and uses the last in, first out method.
first to exit (FIFO) in the accounting of their inventories, hence it does not suffer variation
some.
Likewise, the fixed asset accounts do not undergo changes as no new assets are acquired nor
Old assets are being decommissioned. Likewise, fixed assets will be used at 100% capacity.
installed. For its part, accumulated depreciation is the only account of fixed assets that suffers
variation due to the accounting of the depreciation of the period caused in the state of
results.

Previous balance + depreciation of the period = New balance

6,800,000 + 6,800,000 = 13,600,000

Regarding current liabilities, the company's automatic financing (suppliers and liabilities)
labor costs) will also grow by the same percentage as sales (42.86%), as they depend on
directly from the production and marketing that the company has with its suppliers
like with their direct clients.

The balance of the tax account is calculated following the accounting procedures as set forth
show below:
Previous balance + period taxes - previous period taxes = New balance
340,300 + 2,710,300 - 340,300 = 2,710,300
The taxes for the period are taken from the provision calculated in the income statement.

In the equity, an important change is also presented: to the retained earnings of the previous period.
The projected profit reflected in the income statement is added.
540,450 + 4,065,450 = 4,575,900

The other obligations with financial entities that are both in current liabilities.
As in long-term liabilities, they will not suffer any variation since it was chosen as a policy not to make
principal payments.

These are the balances, historical and projected, prepared based on each of the
defined policies.

Active Base Year Projected

Current or circulating
Box $957,250 1,367,500

Accounts Receivable 16,380,000 23,400,000

Raw Material 4,500,000 4,500,000

Total Currents $21,837,250 29,267,500

Fixed

Team 3,500,000 3,500,000

Buildings 25,000,000 25,000,000

Machinery 18,000,000 18,000,000

 Depreciation -6,800,000 -13,600,000

Net fixed total $39,700,000 32,900,000

Total Assets $61,537,250 62,167,500

Passive

Short-term current

Short-term Obligations 5,000,000 5,000,000

Suppliers 70,000 100,000

Overdraft 4,500,000 4,500,000

Labor Passive 416,500 595,000

Taxes 340,300 2,710,300

Total current liabilities 10,326,800 12,905,300

Long Term

Long-term Obligations 35,700,000 35,700,000

Total long-term liabilities 35,700,000 35,700,000

Total liabilities 46,026,800 48,605,300

Equity Capital

Usefulness of exercise 510,450 4,575,900

Common capital 15,000,000 15,000,000

Total equity 15,510,450 19,575,900

Total Liabilities and Equity 61,537,250 68,121,200

Need or Surplus 6,013,700

conclusions

When the pro forma balance sheet is completed, the total assets, total liabilities, and the
equity (shareholders' equity), rarely matches). The difference between investment and financing is
original when very little or too much funding is projected for the growth volume of
the expected assets. If the difference is in favor of the investment, it will mean that there will be a
need for additional funds. On the other hand, when the difference is in favor of financing, the
projections will show an excess of financing.
According to the results obtained, there is a difference between assets and financing. That difference of
6,013,700 in favor of liabilities plus equity reflects the benefits of the forecast if fulfilled
everything as he has arranged. If there is actually an increase in production and sales
down 42.86% compared to the previous period, the profits will have a very favorable behavior.
for the shareholders, to the point of having an excess of financing. If the results were
the projected, the company could reduce its financing by paying off those obligations that
they have a higher cost of capital (overdrafts for example) or simply authorizing a payment of
cash dividends resulting from excellent operational results. Not recommended
increase assets as it would violate profitability indicators, unless the
investment made contributes in the future to yields equal to or greater than those calculated in
the present projection.
As can be seen, this method allows for the perception of red flags or favorable points in the
formulated policies. It will then be a fundamental task of the Financial Manager to recommend
the continuity of the plans or on the contrary, make significant changes in order to reorient
the direction of the organization.
The projected balance forecasting method is straightforward, simple, and very practical. It facilitates a better
interpretation of the results does not require the development of complex processes that demand
time and tools that may not be accessible to people who wish to know
the impact that financial statements suffer due to changes in strategies, objectives, and policies,
changes often necessary that businesses require for better evolution.
4 Financial budget.

The essence of the financial budget arises from the information generated by the budget of
operation. It is considered that there are three major plans that encompass a planning model:
the market plan, the input requirements plan, and the financial plan. The first two constitute
the basis for preparing the operating budget and once it has been integrated, it is used
as a reference for preparing the financial budget that together with the operational one constitutes the
tool to translate, in monetary terms, the design of actions that will need to be carried out
according to the final stage of the strategic planning model.

4.1 Cash budget.

The cash budget is multifaceted: it has a lot to offer to the management of a
company for the development of the task of coordination and leadership towards the position it achieves
reach its maximum value. This budget is usually developed by the company's treasurer,
who depends on the finance director and is responsible for managing the liquidity of the
company.
The cash budget could be defined as a forecast of the inflows and outflows of
effective that diagnoses future shortages or surpluses and, consequently, forces planning the
investment of the surpluses and the recovery-obtainment of the deficiencies.
For a company, it is vital to have timely information about the behavior of its cash flows.
cash, as it allows you optimal management of your liquidity and avoids serious problems due to
her absence. Insolvency could lead to bankruptcy and the intervention of creditors, about
everything in an era where the most scarce and expensive resource is cash.

It is easier for a company to go bankrupt due to lack of liquidity than due to lack of profitability, which
it demonstrates the importance of good liquidity management. Therefore, it is necessary
to understand the behavior of cash flows, which is achieved through the budget of
cash.
The liquidity of an organization is equal to its ability to convert an asset into cash.
In general, to have the appropriate means of payment and to meet obligations timely.
contracted in the short term. A company's liquidity depends on two dimensions:
• The time required to convert the asset into cash.
• The level of security associated with the price at which the asset will be executed.

Objectives of the cash budget

The objectives of the cash budget are:
Diagnose what the cash flow behavior will be over the period or
periods in question.
2. Detect in which periods there will be cash shortages and surpluses and how much they will amount to.
3. Determine whether the collection and payment policies are optimal by conducting a review that
free up resources that will be channeled to finance the detected shortfalls.
4. Determine if the amount of cash resources invested is optimal in order to detect if
there is about subinversion.
5. Establish dividend policies in the company.
6. Determine if the investment projects are profitable.

Cash strategies
It is remembered that the cash to be maintained constitutes a quantity of resources whose
opportunity cost must be justified. For example, one can have good liquidity with a
large amount of cash in the bank, which does not generate high interest rates; instead, if
If it were invested in Cetes or other securities, it would generate attractive annual interests. Also today
there is the option of the master account that generates an attractive interest and also allows for a
great liquidity. That is why it is necessary to determine what the amount to be kept should be
cash and periodically conduct an assessment of its management. Different aspects will be analyzed.
aspects of cash to avoid over-investments and shortages.
Methods to prepare the cash budget
Currently, many companies may show profits and yet not have
cash to meet its operational and financial commitments. The described circumstance
it happens because, in accounting, revenues are recorded when they are earned and expenses
when they are incurred. This procedure—the most common in companies—is known
like accrual accounting. On the other hand, there is cash basis, which consists of
recognize income and expenses on the date they generate inflows or outflows of cash. Both
they are very interesting, but the objective of each one is very different. The objective of the cumulative base is
determining the correct utility and that of the cash basis is to know the behavior of the flow of
cash. When preparing the cash budget, it is necessary to apply this last one.

There are three most commonly used methods for preparing the cash budget.
1. Cash flow method
2. Budgeted income statement method.
3. Projected Balance Method

Method of cash inflow and outflow

It consists of conducting a careful investigation of the different transactions that will provoke
inflows and outflows of cash, and try to distinguish those that are normal from those that are not. This
division between normal and exceptional detects whether the increase or development of liquidity of the
the company is funded with normal or extraordinary resources. For example, a company
finds that 60% of its cash inflows are exceptional and 90% of its outflows are
normal ones, those that are partially covered by exceptional entries; in this case, one could
to assert a priori that this growth is not healthy.

Normal transactions refer to the cash inflows or outflows generated by

the activities specific to the company according to the line of business it is engaged in and that are
repetitive.
It is necessary to conduct an analysis of all the company's clients and group them according to
the credit conditions they have chosen to determine when collections will take place
based on the credit policies. It is of great importance that this study is carried out with the
greater precision to avoid a collections forecast that causes errors.
Cash sales and customer collections are basically the sources of cash inflow.
normal.

Exceptional entries consist of interest earned on investments, sales of

non-current assets, obtaining loans or new contributions from shareholders, etc.
The normal entries plus the exceptions constitute the total entries.

Normal outflows are basically made up of payments to suppliers, payroll payments and
benefits, tax payments and any other specific payments related to the
company operations. Suppliers must be analyzed with the same methodology of
charging that customers, by conducting an analysis of the suppliers' policies
chosen by the administration for payment to determine cash outflows by
to carry out.

Exceptional cash outflows consist of items such as dividend payments,

acquisition of non-current assets, payment of short and long-term liabilities, etc.
Once the total outputs are determined, they are compared with the total inputs, which yields the
cash balances.
The classification of entries and exits into normal and exceptional fundamentally resides
in the characteristic of the repetitiveness of said operation. Supported by this principle, each
the company must adopt the classification it deems appropriate to prepare its budget for
cash.
The following scheme shows the mechanics of the method for budget preparation.
cash:

Cash budget
January February March Etc.
Initial cash balance XX
(+) Regular tickets:
Cash sales XX
Charge to clients XX
Others XX
Total XX
Exceptional entries
Obtaining loan XX
New contributions from shareholders XX
Sale of machinery XX
Total XX
Total number of entries XX
Available XX
(—) Normal exits:
Payment to suppliers XX
PayrollXX
Various taxes XX
Expenses XX
Income taxes XX
Total XX
Exceptional outputs:
Payment of liability XX
Purchase of building XX
Payment of dividends XX
Total XX
Total exits XX
Cash flow before the desired minimum balance XX
(-) Balance to be maintained XX
Surplus or deficit XX
Financing or investment XX
Final cash balance XX

Example:

From the cash inflows and outflows method

The company Karol, S.A., provides the following information to prepare the budget for
cash

1. The budgeted sales for 20X1 are:

Enero
Sales $100,000 $120,000 $80,000 $320,000 $480,000 $400,000

80% of the sales are on credit, and the remaining 20% is cash. Of the credit sales, 70% is collected.
in the corresponding month and the balance during the following one; the same happens for the quarters.
The accounts receivable for December 20X0 amount to $18,000.

2. The budgeted purchases for 20X1 are:

 Enero
Purchases $40,000 $30,000 $60,000 $220,000 $300,000
$250,000

The purchases in December of 20X0 amounted to $20,000. Payment is made to suppliers during the
next month of the purchase. The same applies to the quarters, since they will be paid in the
next quarter.

In February, machinery was purchased for $100,000, which will be settled in the corresponding month.
In the second quarter, another one was acquired with a value of $200,000.

4. Other income and other cash expenses are:

Enero
$1,000 $800 $3,000 $1,500 $3,000 $1,000

January February March II quarter III quarter IV quarter

Other expenses $500 $300 $1,000 $1,000 $2,000 $1,000

5. The payroll to be settled in 20X1 will be:

January February March II quarter III quarter IV quarter

Payroll $10,000 $12,000 $12,000 $30,000 $32,000 $36,000

A mortgage loan of $50,000 was requested, which will be granted in March.

The income tax will be $15,000, payable in March.
New contributions from shareholders of $20,000 are planned for the third quarter.
The minimum cash balance to maintain will be $5,000; initially, there was $5,000 in cash.

With that data, prepare the following documents:

a) Collection bill for credit sales.
b) Cash receipt voucher.
c) Cash outflow voucher.
d) Cash budget.
e) Set financing and surplus investment policies.

Solution:

a) Collection voucher

Enero
70% of sales on credit $56,000 $67,200 $44,800 $179,200
$268,800
30% de las ventas a crédito del periodo anterior18,000 24,000 28,800 19,200 76,800 115,200
$74,000 $91,200 $73,600 $198,400 $345,600 $339,200

b) Cash entry slip

Enero
Normal entries:
Cash sales $20,000 $24,000 $16,000 $64,000 $96,000
$80,000
Charging clients 74,000 91,200 73,600 198,400 345,400 339,100
94,000 115,200 89,600 262,400 441,600 419,200
Exceptional Entries
1,000 800 3,000 1,500 3,000 1,000
Loan 50,000
New contributions 20,000
Total 1,000 800 53,000 $1,500 23,000 1,000
Total entries $95,000 $116,000 $142,600 $263,900 $464,600
$420,200

c) Cash Outflow Statement

January February March II quarter III quarter IV quarter

Normal outputs:
Payroll payment $10,000 $12,000 $12,000 $30,000 $32,000
$36,000
Pago de proveedores 20,000 40,000 30,000 60,000 220,000 300,000
Income tax 15,000
Total 30,000 52,000 57,000 90,000 252,000 336,000
Exceptional exits:
Other expenses 500 300 1,000 1,000 2,000 1,000
Purchase of machinery 100,000 200,000
Total 500 100,300 1,000 201,000 2,000 1,000
Total exits $30,500 $152,300 $58,000 $291,000 $254,000
$337,000

d) Cash budget

Enero
Initial balance $5,000
95,000 116,000 142,600 263,900 464,600
420,200
Available cash $100,000 $121,000 $147,600 $268,900 $469,600
$425,200
Total departures 30,500 152,300 58,000 291,000 254,000 337,000
Minimum desired 5,000 5,000 5,000 5,000 5,000 5,000
Cash needs $35,500 $157,300 $63,000 $296,000
$259,000 $342,000
Surplus or deficit $64,500 -$36,300 $84,600 $27,100 $210,600
$83,200

e) Financial planning:
The surplus of $64,500 from January will be used to cover the shortfall from February and the difference, which is
$28,200 must be invested in Cetes or in securities that generate positive returns, as it is anticipated
a balance in the company's liquidity throughout the year. The same should be done with the surplus.
from March, which amounts to $84,600. The shortfall for the second quarter ($27,100) must be financed.
with the surplus from the first quarter; the surpluses from the III and IV quarters must be invested in
a profitable activity whose term will depend on next year's liquidity.