Hi. Good to see you again.
In the last video,
we saw income statement and the ending cash estimated from the income statement.
Now, we go through the balance sheet components
that are relevant to the budgeting process.
What components are we talking about?
Those that are related to the cash,
and by consequence, the working capital.
Here are they – the accounts receivables,
the inventory, the fixed assets,
and the accounts payable.
They have to be estimated because the budgeting process outcomes
are not designed to support the balance sheet construction directly.
So, talking about accounts receivables,
companies typically give customers a credit period,
which means, they pay their purchase days after the original acquisition.
So, there is a delay in the payment which leads the company to
have an average accounts receivable in days outstanding.
And this is the formula.
This formula is a simple way to estimate the receivables cash in delay.
We can adopt an alternative approach.
We choose to layer back the receivables according to
the percentage of sales from former months to receive in a specific month.
So, to estimate the receivables in this specific month,
we can apply a table that estimates the residual receivables of former months.
For example, let's assume that for a month N,
the receivables followed this table here.
So, the receivables cashed in month N would be composed of 10% from month N minus three,
15% from month N minus to two,
25% from month N minus one,
and 50% from the current month,
the month N. Look at this example here.
So, in month N,
the receivables cashed in would be a 117,000 due to the credit sales from month N
minus three to a month N. Taking consideration
that if you layer the receivables too much to the previous month,
your budget will become unwieldy.
So, don't do this for more than three or four months.
The gain inaccuracy doesn't pay the effort to construct a budget.
Some final words on accounts receivables.
Check for credit policy change,
they will impact the budget.
Check for large receivables, in this case,
the day sale is outstanding when you change substantially.
Talk to people who can provide information on this subject.
Now, talking about inventory.
As I mentioned before,
inventory level impact the working capital.
A higher inventory demands higher working capital.
Each budgeted period should have the amount
of inventory proportionally to the cost of goods sold.
And to do so, we have to calculate the days of inventory by this formula here.
This formula is for a year.
That's why the 365 days in period.
The ending inventory has to be related to budgeted COGS,
Cost Of Goods Sold,
because any mismatch will lead the company to lose
sales or to carry additional inventory.
Either way, the company will lose money.
Let's think about an example to illustrate the concept
of days of inventory applied in the budgeting.
So, the question is,
what should be the ending finished goods inventory level for a quarter, in money basis,
for a company with 53 days of inventory estimated in its budget,
and the budgeted COGS of $1,120,000 in a quarter?
So, applying plain algebra here,
the ending inventory would be $652,308 worth of finished goods.
Then, calculate the inventory levels needed for each of the budgeted periods,
following these steps just showed.
Now, let's move to fixed assets.
This information comes from the capital budget that we have seen before.
The selected projects of capital budget generate most of
the fixed asset budget including production equipment.
But, it's not all what we need.
Let's not forget that there are other assets to consider such as computers,
furniture, vehicles, office equipments.
Now, talking about accounts payable.
This item is similar to the accounts receivables
in regarded nature of credit selling or credit buying.
Therefore, we calculate the accounts payable days by the formula.
Take a look at the video.
So the question is,
what would be the budgeted ending accounts payable for each quarter,
for a company with $320,000 of annual accounts payable,
and $2,500,000 of annual credit purchases?
Answering in parts.
First, applying the formula of accounts payable,
which is in the video. Take a look.
So, we have come to the conclusion here, it's 47 days.
Then, calculating the quarter ending accounts payable.
Assuming the accounts payable for a quarter is $80,000,
so applying the formula,
we have $41,319 in accounts payable.
Then, following this step showed,
we can calculate the ending accounts payable to each of the quarters.
We have gone through the most relevant items of the balance sheet.
But, we still have to analyze cash behavior and financing needs.
We'll discuss these topics in the next video.
Please follow through the steps of the course.
And see you soon. Bye.
