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Cash Disbursements

Next comes a forecast of cash disbursements. Given the sales forecast, management may choose to gear production closely to seasonal sales, to produce at a relatively constant rate over time, or to have mixed production strategy.

Production Outlays. Once a production schedule has been established, estimates can be made of the needs for materials, labor, and additional fixed assets. As with receivables, thert is a lag between the time a purchase is made and the time of actual cash payment. If suppliers give average billing terms of "net 30" and the firm's policy is to pay its bills at the end of this period, there is approximately a one-month lag between a purchase and the payment. If the production program of Pacific Jams calls for the manufacture of goods in the month preceding forecasted sales, we might have a schedule of disbursements for purchases and operating expenses like that. As we see, there is a one-month lag between the time of purchase and the payment for the purchase. As with the collection of receivables, payment for purchases can be lagged for other average payable periods. The setup is similar to that illustrated for collections. With a computer-based spreadsheet program, it is an easy matter to set up a lagged disbursement schedule (and a lagged collections schedule as well).

Wages are assumed to vary with the amount of production - but not perfectly. Generally, wages are more stable over time than are purchases. When production dips slightly, workers are usually not laid off. When production picks up, labor becomes more efficient with relatively little increase in total wages. Only after a certain point is overtime work required or are new workers needed to meet the increased production schedule. Other expenses include general, administrative, and selling costs; property taxes; interest; power, light, and heat; maintenance; and indirect labor and material. All of these expenses tend to be reasonably predictable over the short run.

Other Disbursements. In addition to cash operating expenses, we must take into account capital expenditures, dividends, federal income taxes, and any other cash outflows not already accounted for. Because capital expenditures are planned in advance, they are usually predictable for the short-term cash budget. As the forecast becomes more distant, however, prediction of these expenditures becomes less certain. Dividend payments for most companies are stable and are paid on specific dates. Federal income tax estimates must be based on projected profits for the period under review. Other cash outlays might consist of the repurchase of common stock or payment of long-term debt. These outlays are combined with total disbursements for purchases and operating expenses to obtain the schedule of total cash disbursements shown.

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