Question

A corporate treasurer argues that their company has a highly positive historic Net Cash Flow from operations, so a bank should not request a future Cash Budget for an upcoming ad-hoc working capital line. How should the credit appraiser validly counter this statement based on financial lending principles?

Q: Answer-A corporate treasurer argues that their company has a highly positive historic Net Cash Flow from op...

The document clearly notes that a cash budget is explicitly a projection into the future, whereas a cash flow statement is historical in nature. For short-term lending, ad-hoc, or seasonal facilities, banks require a forward-looking cash budget to ensure that adequate net cash surpluses will actively accumulate over upcoming specific intervals to settle the temporary debt. Past operational cash flows cannot guarantee the precise matching of near-term liquidity windows.

A A cash budget is identical to a cash flow statement, so the treasurer is mathematically incorrect.

B Historic cash flows indicate equity growth, whereas cash budgets determine long-term fixed asset depreciation schedules.

C A cash flow statement is a historical reflection of fund movements, whereas a cash budget is a forward-looking projection tool used to judge near-term liquidity matching.

D Cash budgets are legally mandatory under the Companies Act, whereas historic statements are entirely optional.

E A cash budget automatically ignores peak and non-peak business fluctuations.

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