Cash Budgeting and Management Information Systems Cash budgets are part of the forecast-plan-implement-control loop of management information systems

Cash Budgeting and Management Information Systems Cash budgets are part of the forecast-plan-implement-control loop of management information systems

shown in Figure 8-25. At the top of the loop are the monthly or quarterly sales forecasts that are the basis for financial and other plans, including the cash budgets presented in this chapter. No plan for the future can be any better than the assessment of what the future will bring. A CFO can examine the cash budgets for successive periods and compare forecast sales with actual sales for the same period. If there is serious disagreement or systematic bias, the forecasting models and procedures need correcting.

288 ❧ ® Corporate Financial Analysis with Microsoft Excel Figure฀8-25

The Forecast-Plan-Implement-Control Loop of Management Information Systems

EXTERNAL DATA

(General economic conditions, technological advances, changes in social customs and mores, etc.)

FORECAST (Demand, sales, costs, etc.)

CONTROL

PLAN

(Production output, costs, (Capital investments, budgets, quality levels, scrap rates,

schedules, inventory levels, customer satisfaction, etc.)

resource commitments, etc.)

TAKE ACTION (Implement plan.)

INTERNAL DATA

(Sales records, cost account reports, financial records, etc.)

Much of a cash budget is taken up with such matters as (1) the collection of accounts receivable for goods or services sold; (2) payments for labor, materials, and supplies for producing the company’s prod- ucts; (3) scheduled output of products; and (4) various other expenses. The accounts receivable, accounts payable, cost accounting, production records, and other parts of management information systems track the actual amounts of these items. When actual values differ significantly from planned values, a CFO should insist that the offending organizations take corrective action—and the sooner, the better.

Enterprise Resource Planning Enterprise resource planning (ERP) systems are large computer-based software systems used to manage and

coordinate the resources and functions of corporations based on information from shared data stores. ERP systems evolved in stages from the systems for material requirements planning (MRP) that were used during the 1960s and early 1970s to calculate material requirements for manufacturing; through the later sys- tems for MRP to schedule the use of materials, factory tools, and personnel; and, finally, culminating in the overall concept and implementation of today’s ERP systems.

(Continued)

Cash Budgeting ❧ 289

ERP systems are cross-functional. They coordinate such financial functions as the general ledger (i.e., the main accounting record of a business, which keeps account of such items as current assets, fixed assets, liabilities, revenues, and expenses), cash budgeting and management, accounts receivable, accounts payable, and fixed assets.

Besides financial functions, ERP systems include managing and procurement of goods and services; manufacturing and service operations; inventories of materials, supplies, and finished goods; quality control of incoming goods and finished products and services; human resources; and customer relations.

The elements of an ERP system include (1) a data warehouse that has self-service interfaces for customers, suppliers, and employees for inputting and accessing data; (2) an access control system that limits users to those with proper authorization; and (3) customization to extend or change the functions covered and the flow of information to fit a corporation’s special needs.

ERP systems are basically large-scale linked systems that combine the basic functions of data access, analy- sis, and reporting that can be done with Microsoft Excel.

Cash Budgets and Operations Besides being a financial plan, a cash budget is an operating plan and an operating budget. The elements

of cash budget spreadsheets can be organized in modules according to organizations and their functions. One module covers such marketing information as sales forecasts of customer demands. Another module covers a firm’s production or operations organization and indicates the units of output each period and the flow of units into and out of warehouses or other holding areas. A third covers financial management and reports on cash inflows and outflows. A cash budget spreadsheet integrates the operations and links results in one area with those in others.

When several strategies are available for coping with problems or capitalizing on opportunities, spreadsheets serve as digital laboratories for experimenting with each and identifying which is best. Start your analysis with a spreadsheet for the base conditions. Then modify the spreadsheet (or a copy of it) for each strategy to determine revenues, costs, and other marketing, operating, and financial information.