Cash Budget: How to Determine Borrowing and Repayment Needs
Cash-budget questions are usually a sequence problem: calculate cash before financing, compare it with the minimum requirement, then borrow or repay.
Cash available
Start with beginning cash and add expected cash collections for the period.
Cash disbursements
Subtract operating, capital, tax, dividend, and other cash payments expected during the period.
Minimum cash balance
Compare the resulting cash balance before financing with the required minimum cash balance.
Financing decision
Borrow enough to cover the shortfall or repay debt when excess cash is available, subject to the question's financing assumptions.
The takeaway
Cash-budget borrowing is determined only after operating cash flows are calculated and compared with the required minimum cash balance.
Related Summit resources
FAQ
What is the key distinction?
Cash-budget borrowing is determined only after operating cash flows are calculated and compared with the required minimum cash balance.
What should I identify first?
Cash-budget questions are usually a sequence problem: calculate cash before financing, compare it with the minimum requirement, then borrow or repay.
Why is this tested?
Build the financing section of a cash budget from beginning cash, collections, disbursements, minimum cash requirements, and borrowing.