Planning Lines of Credit Tutorial

These pages are designed for students in Intro to Finance and other elementary Finance courses.

These pages are not meant to replace your textbook. They are provided as an adjunct to help you with practical problems and assignments.

This tutorial starts at the point where you have completed the AS3.WK4 assignment cash budget schedule. The assumptions and directions for preparing the cash budget are not repeated here!

The sample table shown below is for the first six months of the planning cycle. Look it over to orient yourself. You should be familiar with this work and what it took to get this much done.

The important number to study is the Net Cash Position for each month. This line indicates what the checking account balance would be if your cash flows worked out as planned and also includes the extra margin for safety. Another way to look at the net cash position is that it predicts your indebtedness to the bank if you borrow all the money you need from the bank to keep your checks from bouncing.

The chart of 12 months of the cash budget shows the behavior of the net cash position

Since net cash position increases and decreases the financial manager woould have to borrow and pay pack several times during the year.

Since net cash position gets above zero twice the firm will be able to completely get out of debt twice during the year.

The amount of borrowing or repayment is equal to the difference in the net cash position each month. Of course you would never pay back more than you borrowed.

EXAMPLE

Note the net cash position numbers do not match up exactly with the table above because this table was taken from another illustration of a similar problem.

The total loans outstanding are equal to the net cash position when it is negative and zero when it is positive and the amount of monthly borrowing is equal to the change in the loans outstanding.

Comments and Suggestions should may be sent togramborw@tiger.uofs.edu