APPLYING MONTE CARLO SIMULATION TO CASH BUDGETING FOR BIMSON CEMENT JOINT STOCK COMPANY

FOREIGN TRADE UNIVERSITY
UNIVERSITY OF RENNES 1 (FRANCE)

MASTER THESIS
Major: Finance (Treasury)

APPLYING MONTE CARLO SIMULATION TO
CASH BUDGETING FOR BIMSON CEMENT
JOINT STOCK COMPANY

Student’s full name:

HOANG Thanh Huyen
NGUYEN Thi Kim Thanh

Intake:
Supervisor:

2015-2016
Assoc. Prof., PhD. NGUYEN Viet Dzung

Hanoi, August 2016


TABLE OF CONTENTS
ABSTRACT 4
ACKOWLEDGEMENT.............................................................................................5
LIST OF ABBREVIATIONS.....................................................................................6
LIST OF FIGURES.....................................................................................................7
LIST OF TABLES.......................................................................................................8
CHAPTER I9

INTRODUCTION......................................................................................................9
1.1. Purpose (Statement of problem)..........................................................................9
1.2. Structure of the thesis.........................................................................................11
CHAPTER II 11
THEORETICAL FRAMEWORK...........................................................................12
2.1. Cash budgeting...................................................................................................12
1. Overview of cash budgeting............................................................................................................12
2. The role of cash budgeting in manufacturing firms..........................................................................14
3. Cash budgeting techniques..............................................................................................................15

2.2. Overview of Monte Carlo Simulation...............................................................19
a. Introduction to Monte Carlo Simulation..........................................................................................19
b. Monte Carlo simulation in finance...................................................................................................20
c. Steps in the Monte Carlo simulation................................................................................................20
2.2.4 Using Monte Carlo simulation as cash budgeting tool................................................................22

CHAPTER III 22
APPYLING MONTE CARLO SIMULATION TO CASH BUDGETING FOR
BIM SON CEMENT JOINT STOCK COMPANY................................................22
3.1. Introduction about Bim Son Cement Joint Stock Company..........................22
1. Brief introduction.............................................................................................................................22
2. Main products of the company........................................................................................................24
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Applying Monte Carlo simulation to cash budgeting for BCC
3. Financial performance of the company in the last 2 years...............................................................25
4. Position of the company in the industry.........................................................................................27

ii. Applying Monte Carlo simulation to cash budgeting for Bim Son Cement

Joint Stock Company................................................................................................29
3.2.1. Cash budgeting steps using Monte Carlo simulation..................................................................29
Figure 5: Cash budgeting steps using Monte Carlo simulation............................................................29
30
3.2.2. Assumptions...............................................................................................................................30
3.2.3. Process of cash budgeting for the company...............................................................................36
3.2.4. Result and analysis.....................................................................................................................43
3.2.5. Recommendations for Vietnamese firms and Bim Son Cement Joint stock Company...............45

CONCLUSION..........................................................................................................47
REFERENCES..........................................................................................................48
1. .........................................................................................................48
2. (website of BCC)...................................................48
3. (website of Hanoi Stock Exchange)....................49
4.Andreas Grau, 2012, How can I implement Monte-Carlo Simulations in
MS Excel? .......................................49
5.Create a Monte Carlo Simulation using excel......................................................49
.......................................................................................49
6..........................................................................................49
7.......................................................................................49
8....................................................................................49
APPENDIX A49

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Applying Monte Carlo simulation to cash budgeting for BCC

ABSTRACT
Monte Carlo simulation is a useful capital budgeting tool that allows the user to reflect

the uncertainty associated with various cash components. The output from the
simulation consists of distributions of net cash flows, which can be used for decisionmaking and risk management. However, Monte Carlo simulations are often
implemented using specialized software, making them inaccessible to many people
because of its difficulties and cost consuming. In this thesis, we demonstrate how to
implement Monte Carlo simulation to cash budgeting for a manufacturing company
using Microsoft Excel which is not only easy to use and understood but also delivering
the reliable outputs that will be useful for the managers in cash management and
decision making.

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Applying Monte Carlo simulation to cash budgeting for BCC

ACKOWLEDGEMENT
We would like to express our gratitude to all those who help us to complete this thesis.
Especially, we would like to thank our supervisor Assoc. Prof., PhD. NGUYEN Viet
Dzung for his supervision, time and patience during the course of this thesis. We
would also like to thank the lecturers at the University of Rennes 1, Foreign Trade
University and our colleagues in the MSc course. Finally, we would like to extend our
sincere thank to our families and friends for their love, support and encouragement
which were extremely important for the completion of this thesis.

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Applying Monte Carlo simulation to cash budgeting for BCC

LIST OF ABBREVIATIONS
BCC

Bim Son Cement Joint Stock Company

MCS

Monte Carlo Simulation

COGS

Cost of goods sold

CBBL

Cash Balance Before Loan

ARP

Average receivable period

APP

Average payment period

MS Excel

Microsoft excel

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Applying Monte Carlo simulation to cash budgeting for BCC

LIST OF FIGURES
FIGURE 1

Fluctuation of cash and cash equivalents of BCC from 2006
to 2016

10

FIGURE 2

Five steps for a cash budgeting

17

FIGURE 3

Steps to follow Monte Carlo simulation

21

FIGURE 4

Breakdown of sales by geographical

26

FIGURE 5

Cash budgeting steps using Monte Carlo simulation

30

FIGURE 6

Normality test for Net sales data

33

FIGURE 7

Net sales of BCC from Q4/2006-Q4/2015

33

FIGURE 8

Generating net sales

39

FIGURE 9

Calculation of actual net sales

39

FIGURE 10

Calculation of actual COGS

39

FIGURE 11

Calculation of sales collection

40

FIGURE 12

Calculation of COGS payment

40

FIGURE 13

Calculation of financial expenses

41

FIGURE 14

Calculation of Cash disbursement

41

FIGURE 15

Macro output of CBBL

43

FIGURE 16

Macro output of loan

43

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Applying Monte Carlo simulation to cash budgeting for BCC

LIST OF TABLES
TABLE 1

Example of ScenariosAnalysis for cash budgeting

18

TABLE 2

Breakdown of sales from 2014 to 6M/2016

24

TABLE 3

Operating results of BCC from 2014 to 6M/2016

26

TABLE 4

Cost structure of the company 2014-2015

27

TABLE 5

Estimated minimum cash balance requirement for BCC

37

TABLE 6

Mean and Standard Deviation calculation

37

TABLE 7

Average ARP and APP

38

TABLE 8

Minimum and maximum value of income

38

TABLE 9

Minimum and maximum value of expenses

38

TABLE 10

Example of ending cash balance of BCC for next 4 quarters

42

TABLE 11

Example of cash budget of BCC for next 4 quarters

42

TABLE 12

Comparison for actual loan and forecasted loan of Q2/2016

45

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Applying Monte Carlo simulation to cash budgeting for BCC

CHAPTER I
INTRODUCTION
1.1. Purpose (Statement of problem)
The difference between a company that succeeds and one that fails is often cash
management. Having too little cash means a business may have to pass on profitable
ventures or take out loans to overcome liquidity issues. Too little cash may also mean
a company may be unable to operate at normal levels or be forced to shut down
completely. With different stages of development, cash is always a vital factor
securing for smoothly business operations. To avoid these issues, companies rely on
cash budget to plan and control cash receipts and payments.
Ms. Hsin-hui I.H. Whited (RBFS Vol 5. No.1 2014) – an Associate Professor of
Finance at the Hasan School of Business, Colorado – in her research on short-term
financial planning for entrepreneurs has stated that Cash is lifeblood of an
entrepreneurial venture. Without sufficient cash, a venture cannot stay alive. This is
the truth for every type of ventures, from manufacturing ones to trading ones.
Bim Son Cement Joint Stock Company (BCC) was founded in 1980s, during the
starting period of reconstructing Vietnam’s economy and has nearly 40 years of
striving and growing. Today, Bim Son has its own position as one of the leading
enterprises in the domestic cement and clinker market. In the context of high
competition and fluctuation economy recently, alike other enterprises BCC has to
struggle to express itself and improve the effectiveness of the operation. As a
manufacturing company, BCC always requires a certain amount of cash available
satisfying for operating and producing activities. As one of the leading cement
manufacturers in Vietnam that meets the consumption demand of about 70 million
tons per year both for domestic market and exporting market, the cash management
and cash budgeting is for sure the integral matter to take into account for the company.
By using historical data in the balance sheet of BCC from 2006 to the very first month

of 2016, we have seen the fluctuation of cash and cash equivalents of BCC shown in
numbers of minimum value is VND 22 billion, maximum value is VND 352 billion
and the standard deviation is VND 63 billion. The fluctuation of cash and cash
equivalents is shown in the following figure:

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Applying Monte Carlo simulation to cash budgeting for BCC

Figure 1: Fluctuation of cash and cash equivalents of BCC from 2006 to 2016
Times Series for Cash and Cash equivalent
4.0000E+11

VND

3.0000E+11

2.0000E+11

1.0000E+11

0
Q4/2006

Q1/2016
From Q4/2006 to Q1/2016

“What will be the cash balance for the next quarters? How much we need to borrow?”
These are obviously questions that BCC has to answer periodically. By some direct

interviews with accounting manager of BCC, we have learnt that in fact, BCC
estimates and predicts the need of cash in such a very simple way that only answers
the question “what will occur and which will occur” by choosing one of the three
among “the best, the most likely and the worst case” scenarios. They use historical
data to average value of some recent periods which can not exactly represent for the
fluctuation of the data, and then this method seems to be helpful but sometimes the
estimated results will not be correct in comparision to actual data, because it can not
cover all sources of variability and not estimate based on the distribution of
uncertainty input. Moreover, this way of performing the cash budgeting task takes
much time and effort to do this. In the period of unstable world economy, especially in
the cement industry where competetion is increasingly fierce, lacking of cash or
surplus of cash will effect directly to any maufacturing firm. Any delay in inward cash
flow will postpone the production (not enough cash to pay the raw material
suppliers/pay salaries to staffs/pay interests to banks, etc). Any unexpected surplus in
cash will make the investing decision not exactly, not in time with the opportunity. So,
obviously, the company should start studying and applying a forecasting method
regarding all sources of variability and uncertainty input such as Monte Carlo
simulation. This method is a statistical approach which is concerned with experiments
employing random numbers. It is used by proessionals with applications in a wide
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Applying Monte Carlo simulation to cash budgeting for BCC

range of fields including Physics, Finance, Chemistry, Biology and Medicine. There
are several applications of Monte Carlo simulation in finance setting, one of those is
to predict the cash balance for operating and production activities. The uncertainty
aspect that affects the cash balance is the sales. Since the company was listed in the
Hanoi Stock Exchange in 2006, so all the financial statements are published, thus, it is
open and freely for us to obtain the historical data, large enough to get reasonable

result. For all of those typical reasons, the authors choose Bim Son Cement Joint
Stock Company to study in this thesis.
Being aware of the important role of the cash budgeting in a firm and the significance
of applying simulation for better forecasting the potential cash flows in the future, we
have chosen the topic “Applying Monte Carlo simulation to cash budgeting for
Bim Son Cement Joint Stock Company” to study and assess in this thesis in order to
provide some possible recommendations and solutions to improve the cash budgeting
in this manufacturing firm. With the historical data from 4th quarter of 2006 to 1st
quarter of 2016, we also would like to know whether Monte Carlo simulation can
work efficiently to predict and help to reduce effort and time for BCC in performing
cash budgeting or not.
1.2. Structure of the thesis
This thesis includes three chapters, focusing on three parts: introduction, theoretical
and empirical section:
Chapter 1: Introduction
Chapter 2: Theoretical framework
Chapter 3: Applying Monte Carlo simulation to cash budgeting for Bim
Son Cement Joint Stock Company
Despite our effort, as this is our first touch on this subject, shortcomings are about to
be expected. Hopefully, it can still provide some practical knowledge on and inspiring
initial to cash budgeting for Bim Son Cement Joint Stock Company by applying
Monte Carlo simulation.

CHAPTER II
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Applying Monte Carlo simulation to cash budgeting for BCC

THEORETICAL FRAMEWORK

2.1. Cash budgeting
1. Overview of cash budgeting
At first, let’s take a look at what is budget. At its most basic level, a budget is a plan.
It is a plan for owners and managers to achieve their goals for the company during a
specific period of time. A budget allows businesses to meet specific goals by creating
a system of saving and spending money efficiently. Simply defined, a budget is a plan
for using corporate funds in a way that best meets the firm’s wants and needs. The
plan includes a recorded entry of expected income, expenses, and savings over a
specified period of time. The idea of the cash budget is simple: it presents estimates of
anticipated cash receipts and disbursements for a specified period. It provides for
effective use of funds by anticipating potential excesses of cash as well as possible
shortages.
Cash budgeting – also called cash planning/cash controlling technique - is one
section among cash management duties. Cash management is concerned with
minimizing unproductive balances, investing temporarily cash advantageously and to
making the best possible arrangement to meeting planned and unexpected demand on
the firm’s cash. It involves managing of cash flows in and out of the firm that is cash
flows within the firm and cash balances held by the firm at a point of time.
Cash management must be thought of in terms of the overall liquidity needs of the
firm, specifically its current assets and liabilities. In order to reduce the influence of
uncertainties with regard to cash needs and to ensure adequate liquidity, firm has to
gauge the need for protective liquidity. It it necessary for business to maintain a
certain amount of cash in hand of bank always, even if the other current assets are at
sustained figure. Cash is both beginning and the end of the working capital cycle –
cash, inventories, receivables and cash. Cash is the basic input need to keep a business
running on a continuous basis. It is also the ultimate output expected to be realized by
selling the services or product manufactured by an enterprise. Cash management
assumes more importance than other current assets because cash is the most
significant and the least productive asset that a firm holds. The aim of cash
management should be maintain adequate cash position to keep the firm’s operations

in profitable manner. Cash management is required for smooth running and maximum
profitability of the business.
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Applying Monte Carlo simulation to cash budgeting for BCC

CASH BUDGET is the most significant device to plan for and control the cash
receipts and payments. A cash budget is a summary statement of the firm’s expected
cash inflows and outflows over a projected time period. It gives information on the
timing and magnitude of expected cash flows and cash balances over the projected
period. This information helps the financial manager to determine the future cash
needs of the firm, plan for the financing of those needs and exercise control over the
cash and liquidity of the firm. We need to differentiate the two terms: cash forecasting
and cash budgeting. Cash forecasts are needed to prepare cash budgets. Cash
forecasting can be done on short term or long term basis. Generally, forecasts
conferring periods of one year or less considered short-term. Those extended beyond
one year are considered long-term. Short term forecasts are uses to:
 Determine operating cash requirements
 Anticipate short term financing
 Manage money market investments.
Cash budgeting is a time phased schedule of cash receipts and cash disbursements,
and show the estimated cash inflows and outflows over a certain period. It is a tool of
planning cash need of business concern and serves as a cash control device. The cash
budget report aims at ascertaining deviation of actual operations from budgeted ones
and making it possible to compare actual with estimated cash balances at the end of
each plan period. If there is a marked difference between the actual and projected
balances, the cash budget for succeeding period should be revised and included in the
report.
The cash budget is important because it helps the business owner manage the net

working capital of the company. Business owners normally prepare a cash budget
every month, although some business owners choose to prepare the cash budget
quarterly. Cash budget as a short-term financial instrument. The cash budget
document, therefore, tells how much cash is available to the firm at the end of each
month/each quarter. Those activities that increase cash are called sources of cash.
Those activities that decrease cash are called uses of cash. Sources of cash always
involve increasing a liability (or equity) account or decreasing an asset account. This
makes sense because increasing a liability means that we have raised money by
borrowing it or by selling an owner-ship interest in the firm. A decrease in an asset
means that we have sold or otherwise liquidated an asset. In either case, there is a cash
inflow. Uses of cash are just the reverse. A use of cash involves decreasing a liability
by paying it off, perhaps, or increasing assets by purchasing something. Both of these
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Applying Monte Carlo simulation to cash budgeting for BCC

activities require that the firm spend some cash in hand.
2. The role of cash budgeting in manufacturing firms
The cash budget is management’s approximation of cash on hand at the beginning of a
budget period and the estimated cash inflows and outflows. The cash inflows may
include those that result from cash sales, the sale of assets, the collection of accounts
receivable, borrowing cash or stock issuance. The cash outflows may include
disbursements for material purchases, debt repayment, asset acquisition, taxes,
manufacturing costs and dividends. The cash budget highlights a company’s probable
income or deficit for a period, the latter of which the company must address by
increasing expenditures. The importance of the cash budget lies in its ability to
identify a company’s future financing needs, highlight the need for corrective actions
and evaluate a company’s performance. A cash budget is important for a variety of
reasons. It allows the firm to make management decisions regarding its cash position

(or cash reserve). Without the type of monitoring imposed by the budgeting process,
firm may be unaware of the cash flow through its business.
 Financing needs: By creating a cash budget, a company can anticipate when a
cash deficit might exist and the extent of that shortfall. In turn, the budget indicates
when a difference between budgeted and actual values might need to be made up
borrowing. Short-term financing might be required to acquire inventory, promote
products or pay monthly expenses. By predicting cash requirements, a company
can also evaluate future business opportunities in part based on an opportunity’s
probable financing needs and costs. For instance, financing costs will influence the
profitability of a merger and product development. This process allows a company
to select only those organization goals that are financially feasible.
 Corrective actions: A cash budget is a way to determine if a company has the
cash necessary to meet upcoming obligations and to trigger corrective actions if a
company’s actual figures don’t match the budget estimates. For example, a
company experiencing cash-inflow problems may need to borrow money in the
short term for emergency equipment repairs, the payment of taxes or a monthly
payroll. In addition, the company may need to borrow money in the long term for
the introduction of a new product to the market or the replacement of equipment.
The company might also need to respond to a sharp decline in market sales by
adjusting spending or prices or negotiating more favorable terms with lenders.
 Company performance: A cash budget is used to illustrate a company’s financial
position to internal and external stakeholders - individuals with an interest in the
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Applying Monte Carlo simulation to cash budgeting for BCC

company - including investors, suppliers and company leadership. For example,
increasing cash flow may indicate strong demand for the company’s products and
opportunities for company expansion, which are positive signals to current and

potential investors. In contrast, if company expenses are significantly more than
the company’s cash inflow, the investment risk is high and may deter additional
investment in the company. Declining cash flow may also make it more difficult
for a company to obtain additional vendor credit or pay its existing debt, which
might force the company into bankruptcy.
3. Cash budgeting techniques
2.1.3.1. Data for cash budgeting
To prepare a cash budget, we need to use data from the past events, they are:
PAST EVENTS

INCOME STATEMENT

BALANCE SHEET

STATEMENT OF
CASH FLOW

(1) Income statement: An income statement is a financial statement that reports a
company’s financial performance over a specific accounting period. Financial
performance is assessed by giving a summary of how the business incurs its revenue
and expenses through both operating and non-operating activities. It also shows the
net profit or loss incurred over a specific acccounting period.
(2) Balance sheet: A balance sheet is a financial statement that summarizes
company’s assets, liabilities and shareholders’ equity at a specific point of time. These
three balance sheet segments gives investors an idea as to what the company owns and
owes, as well as the amount invested by the shareholders.
(3) Statement of cash flow (CFS): This is the report that records the amounts of cash
and cash equivalents entering and leaving a company. It is derived from the income
statement and the balance sheet. The CFS allows investors to understand how a
company’s operations are running, where its money is coming from, and how it is

being spent. The CFS is distinct from the income statement and balance sheet because
it does not include the amount of future incoming and outgoing cash that has been
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Applying Monte Carlo simulation to cash budgeting for BCC

recorded on credit. Statement of cash flow is used to predict the future cash flow,
which helps with matters in budgeting.
2.1.3.2. Constructing a cash budgeting
Building a cash budget is a short-term financial planning which concentrates on a
company’s cash needs and involves constructing the schedules of sales, inventory
purchases and other cost. Financial statements including income statements, balance
sheets and statements of cash flows over a short period are also forecasted.
Furthermore, it stipulates the major contributor for the cash position during this
period. Each cash budgeting depends on the nature of business, the predictability of
account receivable, etc. To build up a simple cash budget, small steps are arranged in
an orderly fashion and presented as below process:

Figure 2: Five steps for a cash budgeting

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Applying Monte Carlo simulation to cash budgeting for BCC

2.1.3.3. Cash budgeting techniques
 Non-simulation budgeting technique:
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Applying Monte Carlo simulation to cash budgeting for BCC

The net difference between estimated cash inflow and outflow for corresponding
months/quarters is the net cash flow. The value of the net cash flow for each
month/quarter is then compared to the desired cash balance and, if the net cash flow
minus the desired cash balance is negative, the financial decision maker attempts to
arrange for the necessary financing. If the difference between the net cash flow and
the desired cash flow is positive, the financial decision maker may plan strategies in
order to reduce the cash balance, which is dividend payment, purchase of marketable
securities or stock repurchase. However, this technique does not successfully account
for the uncertainty of the forecasts. The forecast mostly based on the treasurer’s
experience only. So, a more comprehensive way to deal with uncertainty in cash
budgeting is that, the treasurers apply the Scenario Analysis or What If Scenario.
This helps to produce several cash budgets based on several forecasted scenarios (e.g.,
persimistic, most likely, optimistic).
Table 1: Example of ScenariosAnalysis for cash budgeting

Criteria

Unit: Billion VND

OCTOBER
Pessimistic

Most likely

Optimistic

Initial cash balance

50

50

50

Total cash receipts

190

200

300

Total cash disbursements

255

240

250

-15

10

100

25

25

25

Loan

40

15

0

Ending cash balance

25

25

100

Cash balance before loan
Minimum cash balance requirement

As per example, we have some possible outcomes from which the treasurer can
determine the amount of financing necessary to cover the most adverse situation.
However, in reality, the variable will not only move within a certain range of
pessimistic-most likely-optimistic. That requires another way to deal with uncertainty
– simulation, which will be described below.
 Simulation technique:

The uncertainty of estimation must be considered in order to provide the decision
maker with a more accurate description of this decision environment. Many authors
(Stancill, James McN., Scranton 1971; VanHorne, James C., Englewood Cliffs, 1971)
have suggested calculating the cash budget based on a number of forecasts, i.e,
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Applying Monte Carlo simulation to cash budgeting for BCC

optimistic, most likely and pessimistic forecasts. Other authors (Budin Morris, Gitman
Lawrence J., Lerner, etc 1971-1973) have suggested the use of simulation in order to
develop a range of possible outcomes and associated probabilities. Eugine M. Lerner,
in 1968, illustrated the application of simulation to cash budgeting utilizing a simple
example. Lerner emphasized the use of simulation to develop expected monthly
values of a firm’s cash balance. The standard deviation of the cash balances was also
provided. The main short-coming of Lerner’s approach was the failure to utilize fully
the information provided. After Lerner, David F.Scott made improvement to the
technique by adding parameters of a simulated distribution. His approach involved
simulating a firm’s gross cash inflows and gross cash outflows and then netting these
figures to obtain net cash flow. The author believes it would be more reasonable to
develop a mathematical model to explain the resulting gross cash flows and then to
generate the key stochastic variables and measure their effects on the net cash flow.
“But the major shortcoming seen in Scott’s work lies in the mathematical model and
the variables simulated” (Thomas M.Cook, Lawrence J.Gitman and Charles Defelice,
Simulation of a corporate cash budget: Application and Validation).
A special simulation named Monte Carlo simulation was first used in 1930s, when
Enrico Fermi used Monte Carlo in the calculation of neutron diffusion. Nowadays,
Monte Carlo simulation are used in finance and mathematical finance to value and
analyze complex instruments, portfolios and investments by simulating the various
sources of uncertainty affecting their value, and then determining their average value

over the range of resultant outcomes. This is usually done by help of stochastic asset
models. The advantage of Monte Carlo methods over other techniques is that
reliability increases as the dimensions (sources of uncertainty) of the problem
increase.
2.2. Overview of Monte Carlo Simulation
a. Introduction to Monte Carlo Simulation
The name Monte Carlo simulation (MCS) comes from the fact that during the 1930s
and 1940s, many computer simulations were performed to estimate the probability
that the chain reaction needed for the atom bomb would work successfully. The Monte
Carlo method was coined then by the physicists John von Neumann, Stanislaw Ulam
and Nicholas Metropolis, while they were working on this and other nuclear weapon
projects (Mahattan project) in the Los Alamos National Laboratory. It was named in
homage to the Monte Carlo Casino, a famous casino in the Monaco resort Monte
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Applying Monte Carlo simulation to cash budgeting for BCC

Carlo where Ulam’s uncle would often gamble away his money.
MCS lets you see all the possible outcomes of your decisions and assess the impact of
risk, allowing for better decision making under uncertainty.
MCS, or probability simulation, is a technique used to understand the impact of risk
and uncertainty in financial, project management, cost, and other forecasting models.
When developing a forecasting model – any model that plans ahead for the future –
we have to make certain assumptions. These might be assumptions about the
investment return of a portfolio, the cost of a construction project, or how long it will
take to complete a certain task. Because these are projections into the future, the best
we can do is estimate the expected value. In finance, the range of values might be
known via the distribution of possible values through the mean and standard
deviation of variable. By using a range of possible values, instead of a single or few

guess, we can create a more realistic picture of what might happen in the future.
When a model is based on ranges of estimates, the output of the model will also be a
range.
When we have a range of values as a result, we will begin to understand the risk and
uncertainty in the model. The key feature of a Monte Carlo simulation is that it can
tell you – based on how you create the ranges of estimates – HOW LIKELY THE
RESULTING OUTCOMES ARE.
b. Monte Carlo simulation in finance
In Corporate Finance, a company often needs to value a project, which for example
may involve an initial outlay with future expected profits. If these future profits can be
estimated accurately then the firm can determine whether these profits will outweight
the costs and can then decide whether to proceed with the project or not. The factors
affecting the future profits could consist of many variables, including but not limited
to interest rate fluctuation, currency exchange rate changes, macro ecomonic factors,
labour costs, environmental issues or advancements in technology. Since each one of
these factors can be multi-dimensional there could be a very large amount of
parameters to be estimated, each having its own distribution. Therefore, MCS can
be implemented. Monte Carlo simulation provides flexibility and can handle multiple
sources of uncertainty. In the concept of this thesis, we focus on cash budgeting for
a manufacturing firm, with the uncertainty called “net sales”.
c. Steps in the Monte Carlo simulation
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Applying Monte Carlo simulation to cash budgeting for BCC

As per Paul Sheehy and Eston Martz in “Doing Monte Carlo Simulation”, an article
based on a presentation delivered at the ASQ Lean Six Sigma Conference in Feb
2012, depending on the number of factors involved, simulations can be very complex.
But at a basic level, all Monte Carlo simulations have five simple steps:

Figure 3: Steps to follow Monte Carlo simulation

 Step 1: Identify the transfer equation
To do a MCS, you need a quantitative model of the business activity, plan, or process
you wish to explore. The mathematical expression of your process is called the “the
transfer equation”. This may be a known engineering or business formula, or it may be
based on a model created from a designed experiment or regression analysis.
 Step 2: Define the input parameters
For each factor in your transfer equation, determine how its data are distributed. Some
inputs may follow the normal distribution, while others follow a triangular or uniform
distribution. You then need to determine distribution parameters for each input. For
instance, you would need to specify the mean and standard deviation for inputs that
follows a normal distribution. You can test the distribution of data by using some
software like Minitab.
 Step 3: Create random data
To do valid simulation, you must create a very large, random data set for each input –
something on the order of more than 10,000 instances. These random data points
simulate the values that would be seen over a long period for each input. This can be
done in MS Excel by using function RAND() or in Minitab by using Calc=>Random
Data=>Normal.
 Step 4: Simulate
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Applying Monte Carlo simulation to cash budgeting for BCC

Let the computer help you. Most of the input data and the reporting should be place in
MS Excel and Macro function in MS Excel will do the task. Or you can use Minitab
software to perform simulation.
 Step 5: Analyze process output

With the simulated data in place, you can use your transfer equation to calculate
simulated outcomes. Running a large enough quantity of simulated input data through
your model will give you a reliable indication of what the process will output over
time, given the anticipated variation in the inputs.
2.2.4 Using Monte Carlo simulation as cash budgeting tool
We have run through 5 steps of doing a cash budget and 5 basic steps to perform a
Monte Carlo simulation. Now what we have to do is mapping the cash budget with the
simulation, determine the object for the model, which is must be “uncertainty”, and
generates variables randomly. In cash budgeting, almost important components as
collection from sales, accounts payable on payments, etc... are calculated indirectly
through Net sales of products and services. There are many factors that affect the sales
of the company, including both subjective and objective factors. Then, sales are highly
variable and only partially predictable. In addition to this characteristic, basing on the
construction of cash budget, we can see that the “uncertainty” in the model is the net
sales in each quarter and this should be determined by a random sample from a normal
distribution with mean and standard deviation. The problem is, we need to check
whether this object follows a normal distribution or not. If yes, we can directly use the
value. Otherwise, we need to use the logarithm of net sales to make the data follow
normal distribution. Details for this will be in the next chapter when we go into
specific data of BCC.

CHAPTER III
APPYLING MONTE CARLO SIMULATION TO CASH
BUDGETING FOR BIM SON CEMENT JOINT STOCK COMPANY
3.1. Introduction about Bim Son Cement Joint Stock Company
1. Brief introduction
• Company profile
22

Applying Monte Carlo simulation to cash budgeting for BCC

Bim Son Cement Joint Stock Company (BCC) is located in Thanh Hoa province of
Viet Nam and was founded in 1980 with the core business of manufacturing and
distributing cement and clinker. Over more than 35 years of development, BCC today
becomes one of the leading companies in the cement industry of Vietnam with the
charter capital of VND 956,613,970,000. BCC was listed on Hanoi Stock exchange
(HNX) from 24/11/2006 and the company is also one of the companies having largest
market capitalization out of the cement companies listing on HNX. They are operating
under the Vietnam Cement Industry Corporation (VICEM) who is holding 73%
charter capital of BCC. Bim Son Cement Joint Stock Company has one subsidiary
named CRC Central Cement JSC which is located in Dung Quat economic zone Quang Ngai province of Vietnam. The core business of this subsidiary is
manufacturing and trading cement with the factory’s designed capacity of 500,000
tons per anum. Up to now, the ownership of BCC in this company is 76,8%.
• Process of formation and development
KEY
KEY MILESTONE
MILESTONE

1980
1980

1981
1981

1993
1993

Wet-technology Bim Son cement factory was founded with designed
capacity of 1.2 million tonnes per anum.

No. 1 line of the plant was put into operation; the very first P400
cement bags labeled "elephant" was officially produced.
Renamed to Bim Son Cement Company, the company under the State
Cement Corporation of Vietnam.
Starting the renovation project to modernize No.2 line of Bim Son

2001
2001

Cement Plant, transferring wet technology to dry technology,
increasing the capacity of the No. 2 furnace from 1,750 tonnes of
clinker per day to 3,500 tonnes of clinker per day.
In May, Bim Son Cement company renamed to VICEM

2006
2006

2007
2007
2010
2010

Bim Son Company was listed at Hanoi Stock Exchange.
The furnace
put intowith
operation.
No.3
clinkerwas
project
dry technology commenced construction

with investment of VND 4,366bn worth.
The furnace was put into operation.
23

2015
2015

Getting Vietnam Quality award in 2015.


Applying Monte Carlo simulation to cash budgeting for BCC

2. Main products of the company
• Core activities:
 Production and distribution of cement and clinker;
 Other products and services.
• Breakdown of sales by products and services for the year 2014, 2015 and the
first 6 months of 2016

Table 2: Breakdown of sales from 2014 to 6M/2016
% of
Criteria
2014
2015
Sales

% of
Sales

Unit: million VND
% of
6M/2016
Sales
2.036.17
92,57%
0

Cement

3.686.586

86,45%

3.829.982

92,22%

Clinker

569.350

13,35%

314.452

7,57%

162.155

7,37%

Others

8.396

0,20%

8.646

0,20%

1184

0,05%

100%

4.153.080

100% 2.199.509

100%

Total

4.264.332

Source: BCC

BREAKDOWN OF SALES BY PRODUCTS AND SERVICES

24


Applying Monte Carlo simulation to cash budgeting for BCC

Cement and clinker are the main products of the company, accounting for 99.8%,
99.79% and 99.95% of net sales in 2014, 2015 and the first 06 months of 2016
respectively. In year 2015 and the first six months of 2016, cement is always
accounting for more than 92% of net sales.

Figure 4: Breakdown of sales by geographical areas for the year 2014 and 2015

Sales revenue of the company in Thanh Hoa province is always accounted for the
largest proportion of sales which is 23,62% of sales in 2014 and 27,12% of sales in
2015. The second one is Hanoi, accounting for 10,37% of sales in 2014 and 11,86% of
sales in 2015.
3. Financial performance of the
25