Question

You are a financial analyst in the Bridgetown Foundation—a public service agency in Chicago that provides specialized mental care services to the poor. The foundation’s financial resources are mainly from various state and federal grants and business or individual donations. In a recent financial audit, an independent auditor suggested the foundation explore the possibility of investing in the market as an additional revenue source. You are assigned the responsibility of analyzing the foundation’s cash flows to determine whether such a possibility exists and, if it does, how much the founda- tion should invest and what the investment strategy should be. You pull out the cash flow information for the last three years as shown in Table 8.7.

Table 8.7 Monthly Cash Flows: Bridgetown Foundation ($) Cash balance (January 1st) Receipts Disbursements Net cash flow, January Two years ago 610,000 865,000 1,050,000 -185,000 Last year 1,245,000 873,650 930,000 -56,350 Current year 2,016,770 871,903 928,140 -56,237 Cash balance (February 1st) Receipts Disbursements Net cash flow, February 425,000 250,000 240,000 10,000 1,188,650 250,500 240,480 10,020 1,960,533 249,999 239,999 10,000 Cash balance (March 1st) Receipts Disbursements Net cash flow, March 435,000 300,000 280,000 20,000 1,198,670 303,000 282,800 20,200 1,970,533 302,394 282,234 20,160 Cash balance (April 1st) Receipts Disbursements Net cash flow, April 455,000 570,000 325,000 245,000 1,218,870 575,700 328,250 247,450 1,990,692 574,549 327,594 246,955 Cash balance (May 1st) Receipts Disbursements Net cash flow, May 700,000 1,096,000 320,000 776,000 1,466,320 1,106,960 323,200 783,760 2,237,647 980,500 945,000 35,500 Cash balance (June 1st) Receipts Disbursements Net cash flow, June 1,476,000 134,000 320,000 -186,000 2,250,080 135,340 323,200 -187,860 2,273,147 135,069 322,554 -187,484

1. Create a cash budget forth next year. Use the proper forecasting techniques (from Chapter 1) and defend your reasoning for your choice of technique. (Use SMA (i.e., average the three provided years) as the forecasting technique in question #1.)

Answer 1

Solution:

Amount $ $ 2,041,304 Bridgetown Foundation Monthly Cash Budget for the Next Year Particulars Cash Balance as on Janurary 1st (Closing of C.Y) ($2,383,009 + $116,926- $458,631) Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, January $ 870,184 $ 969,3801 ($ 99,196) Cash Balance as on February 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, February $ 1,942, 108 $ 250,1661 $ 240,160 $ 10,006 Cash Balance as on March 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, March $ 1,952,114 $ 301,798 $ 281,678 $ 20,120 Cash Balance as on April 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, April $ 1,972,234 $ 573,416 $ 326,948 $ 246,468 Cash Balance as on May 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, May $ 2,218,702 $ 1,061,153 $529,400 $ 531,753 Cash Balance as on June 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, June $2,750,455 $ 134,803 $ 321,918 ($ 187,115)

Cash Balance as on July 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, July $ 2,563,340 $ 281,678 $ 511,0451 ($ 229,367) Cash Balance as on August 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, August $ 2,333,973 $ 372,2181 $326,948 $ 45,270 Cash Balance as on September 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, September $ 2,379,243 $ 286,708 $ 316,888 ($ 30,180) Cash Balance as on October 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, October $ 2,349,063 $ 271,618 $ 337,008 ($ 65,390) Cash Balance as on November 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, November $ 2,283,673 $ 897,369 $ 321,918 $575,451 Cash Balance as on December 1st Receipts (Average of last three years) Disbursements (Average of last three years) Net Cash Flow, December $ 2,859,124 $ 116,695 $ 457,727 $ 341,032 Average Monthly Beginning Cash Balance Receipts Disbursements Net Cash Flows $ 2,303,778 $ 451,484 $ 411,752 $ 39,732