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The short term activities of firms are buying raw materials, paying cash, manufacturing the product, selling the product and collecting cash. During the payment, the cash need occurs. Cash need should be covered by going into a debt. Cash budget is a primary tool in short-term financial planning. It is prepared after the operating budgets (sales, manufacturing expenses or merchandise purchases, selling expenses, and general and administrative expenses) and the capital expenditures budget are prepared.

The cash budget starts with the beginning cash balance to which is added the cash inflows to get cash available. Cash outflows for the period are then subtracted to calculate the cash balance before financing. If this balance is below the company’s required balance, the financing section shows the borrowings needed. The financing section also includes debt repayments, including interest payments. The cash balance before financing is adjusted by the financing activity to calculate the ending cash balance. The ending cash balance is the cash balance in the budgeted or pro forma balance sheet.

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There are 3 important periods for firms which are acc. payable period, inventory period and acc. receivable period. Acc. payable period is the period between buying materials and paying cash. Inventory period is the period between buying materials and collecting cash. And the third period is the period between selling the product and collecting cash. Cash flow management should be done carefully. The mistakes which are made during calculation of NPV and IRR can be compensated, but cash flow must be designed well.

While the company makes cash flow endeavoring, the collection time and collection amount are assumed pessimistic in order to be well-prepared towards collecting problems. The payment should be carried out as late as possible and collecting cash should be carried out as immediate as possible. However, there are some costs of applying both of them. When the payment carries out late, both supplier is found hardy and raw materials are bought more pricy. When collection carries out before time, customer is found hardy and product is sold cheaper. So it is necessary to be careful while applying these two strategies.

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