The cash budget shows the forecasted cash inflows and outflows of a business and measure the estimated balance or
deficit of cashfor a particular period.
The advantages of planning for cash resources is essential since a business cannot survive without cash.
Advantages:
(a)
(b)
Cash deficits are revealed and management can respond by taking appropriate action. Remedial action can
be taken by injecting more capital into the business, by borrowing, by examining their credit policy or by
deferring capital expenditure.
Cash surpluses are indicated and once recognised need to be managed. Management can invest cash in the
short-term, or avail of trade discounts by bulk purchasing materials or finance capital projects.
Example
The London Toy Co. Ltd. commenced operations in December 19x0 with a capital of 600,000 which was raised
through an issue of 600,000 ordinary shares of 1 each. The proceeds of the share issue were paid into the company
bank account. During the course of December a number of transactions took place and these are summarized below.
600,000
300,000
80,000
160,000
Tools
20,000
Raw materials
10,000
570,000
----------
----------
30,000
======
(a)
Sales are budgeted as follows: 80,000 in January; 160,000 in February and 240,000 in subsequent
months. Fifty per cent of the sales will be cash sales and the other fifty per cent credit sales. The period of
credit extended to customes will be one month.
(b)
The cost of raw materials will amount to 40% of the sales revenue. Half the materials cost for any one
month will be paid in cash; the other half will be paid for during the month of purchase.
(c)
The company intends to keep a stock of raw materials of 10,000 throughout the year.
(d)
Direct wages will be incurred at the rate of 50,000 per month. No time lag is expected here.
Other expenses- depreciation on premises, plant and equipment will be calculated on a straight-line basis.The tools
will be re-valued annually and it is expected that annual losses will amount to 20 per cent. All other expenses will be
incurred at the rate of 40,000 per month - the time lag here will be one month.
You are asked to prepare the companys Cash budget, a budgeted Profit and Loss account for the first six months of
operations and a budgeted Balance Sheet as at 30 June 19x1.
Opening balance
Jan
Feb
Mar
Apr
May
Jun
Memo
000
000
000
000
000
000
000
30
(14)
16
70
124
40
80
120
120
120
120
40
80
120
120
120
------
------
------
------
-------
-------
70
124
186
256
310
364
------
------
-----
-----
------
------
Cash inflow
Cash sales
Credit sales
Total
120Dr
Cash outflow
Raw mats. -cash
16
32
48
48
48
48
16
32
48
48
48
50
50
50
50
50
40
40
40
40
40
------
------
------
------
------
------
66
138
170
186
186
186
------
------
------
------
------
------
(14)
16
70
124
178
===
===
===
===
===
===
50
Other expenses
Total
Closing balance
48Cr
40Cr
(a)
(b)
In respect to credit transactions time lags have to be built into the cash budget
It is useful to have a memo column to record items which will appear in the balance sheet if required.
Budgeted Profit and Loss Account for six months ending 30 June 19x1
Cost of sales
480,000
Direct wages
300,000
Sales
1,200,000
780,000
---------Operating profit
420,000
----------
-----------
1,200,000
1,200,000
=======
=======
Depreciation
Operating profit
Premises
7,500
Plant
4,000
Equipment
8,000
Tools
2,000
-------
420,000
21,500
Other expenses
240,000
Net profit
158,500
----------
----------
420,000
420,000
======
======
The profit and loss account is prepared on an accruals basis unlike the cash budget which is prepared on a receipts
and payments basis. Also, depreciation appears as an expense in the profit and loss account.
600,000
Reserves
Profit and loss account
158,500
Fixed assets
Cost
Dep.
NBV
Premises
300,000
7,500
292,500
Plant
80,000
4,000
76,000
Equipment
160,000
8,000
152,000
Tools
20,000
2,000
18,000
---------
--------
---------
560,000
21,500
538,500
--------Current Liabilities
---------
Current assets
Creditors
48,000
Materials
10,000
Accrued expenses
40,000
Debtors
120,000
Cash
178,000
308,000
----------
----------
-------846,000
846,000
======
=====
Budgeted debtors, creditors and cash balance is obtained from the cash budget. Details of fixed assets can be
obtained from the capital expenditure budget. Information about share capital, debentures etc. can also be obtained
from the previous balance sheet.