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Cash budgeting.

Cash flow continues to be a major problem of many firms in a variety of industries. It has been suggested that cash continues to be the major factor in determining whether or not an operation can exist over time (Clarke 1990).

The cash budget is an important tool in managing the resources of any firm. Without a cash plan, difficulties with cash flow may arise unexpectedly, and a firm's creditworthiness may be jeopardized. Thus, the forecasting of cash inflow and outflow should be an integral part of the routine budgeting process. Cash budgets that are prepared in accordance with the Financial Accounting Standards Board 95 format, direct method, are extremely useful in that receipts and expenditures are presented according to operating, investing, and financing activities.

Owners and managers of real estate properties can benefit greatly from the cash-budgeting process. A cash budget may be prepared for each property which lists all appropriate sources and uses of cash within the three categories of activities suggested by FASB 95. A relatively short time frame tends to work best, with monthly budgets being popular and usually adequate for monitoring cash flow.

The twelve monthly budgets for a particular property may be combined to produce quarterly or annual forecasts. Likewise, budgets for individual properties may be combined on a monthly, quarterly, or annual basis to produce aggregate information for all investments. Cash surpluses and deficiencies may be anticipated for individual properties and for the entire operation.

The cash budgeting process forces property managers to plan ahead, as opposed to reacting to difficulties when they appear. Potential problems may be identified before they surface, with plans developed in advance for dealing with such occurrences.

Another major benefit of projecting cash flow is that a forecast may be used at the conclusion of a budget period to evaluate performance. Actual cash receipts and expenditures may be compared to the original forecast so that variances are identified. The property manager can investigate the significant variances, note their likely causes, and take appropriate action to solve any critical problem.

Figure 1 presents an example of a monthly cash budget for residential rental property. The document shows budgeted and actual cash inflows and outflows for operating, investing, and financing activities. The budgeted figures are developed prior to the beginning of the designated month, the actual results represent an accumulation of receipts/disbursements for the respective cash items, and the variances show the differences between expectation and reality. The "comments" section is noteworthy and provides the opportunity for the results of any investigation into the variances to be noted.

Developing a cash flow budget

The property manager must initially forecast those routine and nondiscretionary sources and uses of cash. In the section devoted to operations, for example, cash receipts from three sources are forecasted, with rentals being the dominant source. A variety of cash expenditures related to operating activities are also forecasted, with repairs and interest amounting to large disbursements.

Day-to-day operating items comprise the operating activities section of the TABULAR DATA OMITTED budget, and these needs must be met first. Any net cash inflow from operations ($101,750 in the example) should then be utilized in preparing the forecasts for the investing and financing activities.

Investing activities tend to be rather discretionary in that these items, in many cases, may be postponed or delayed. In Figure 1, for example, equipment purchases of $160,000 were likely budgeted after the expected net cash inflow from operations of $101,750 was developed. When the cash inflow expected from the sale of old equipment was considered, only a small amount of additional financing was likely to be needed. The point is, however, that the purchase of equipment could very well have been postponed.

The other alternative, assuming the purchase of equipment was not postponable and the net cash inflow from operations was expected to be minimal, would be to secure a source of significant new financing.

Repayment of debt tends to be a non-discretionary financing activity. This need, as well as any requirement for financing derived from budgeted operating and/or investing activities, leads to the forecast of financing requirements. When the need exceeds the capability to secure the financing, discretionary items must be deleted and expenses reduced to make the cash budget a viable plan.

Analyzing results

At the conclusion of the month, actual net cash inflow from operations was some $63,000 below expectations. Notations indicate that the expenditures for taxes, interest, and repairs were higher than expected, while cash inflow from the laundromat was below expectations. Investing activities (replacement of stoves and refrigerators) required $15,000 more cash than was expected, while an unexpected increase in the level of financing generated $25,000 cash inflow.

Overall, a forecasted increase in cash of $16,750 turned out to be a decrease of $36,050. The $53,800 difference results primarily from significant variances in the operating activities section.

Attention should be focused on a possible increase in rent and changes in the operation of the laundromat. Increased competition is seriously affecting the stream of cash inflow from the laundromat, so perhaps action to enhance its attractiveness is needed.

The expenditures which exceeded budget in the operating activities section do not seem to be discretionary and, therefore, probably cannot be reduced, although taxes might be appealed. The amount of this month's expenditure for equipment will likely need to be shifted to cover loan repayments in future months.

The property manager needs to deal quickly and carefully with each source and use of cash, as the situation depicted in Figure 1 suggests that serious problems with cash flow are just around the corner.

At year end, data from the twelve monthly budgets may be aggregated in order to prepare the annual cash flow statement. Actual receipts/payments that have been identified with the various sources and uses of cash may be summarized for each property and for all properties as a group. The FASB 95 format, although intended to apply to the preparation of the cash flow statement at the end of a period, is equally useful in the budgeting process at the beginning of and throughout the year.


In summary, cash budgeting is an important and useful tool in managing real estate properties. The document should be routinely prepared for each property and, to enhance its usefulness, cover a relatively short period of time, perhaps one month.

The FASB 95 format is simple, requiring the listing of all sources and uses of cash. It provides for performance evaluation via the comparison of expected and actual cash flows and promotes action by the property manager in advance of identified future difficulties.

A positive operating cash flow over time should be expected from quality rental property. Achieving and maintaining an adequate cash position is indeed indicative of successful property management.

Income Calculations

 No. of Monthly Annual
 units rent totals

Studio 15 $475 $ 85,500
1-bedroom 50 550 330,000
2-bedroom 10 650 78,000

Gross potential
rental income $493,500

Annual vacancy and rent losses:

10 vacancies, monthly
loss of $500 each $60,000

10 vacancies,
concessions at $100 1,000

2 units off/storage,
monthly loss of $500 12,000

2% bad debts x
$493,500 GPRI 9,870

Total annual losses (82,870)

Miscellaneous income 34,500

Effective gross income $445,130

Operating expenses (177,180)

Net operating income $267,950

Debt service (102,000)

Capital expenditures (36,000)

Cash flow $129,950


Clarke, Richard L. "A Case for Long-Range Planning." Healthcare Financial Management 44 (May 1990): 12.

"Earnings, Schmernings--Look at the Cash." Business Week (July 24, 1989): 56-57.

Financial Accounting Standards Board. Statement of Financial Accounting Standards No. 95: Statement of Cash Flows. Stanford, Connecticut: FASB, 1987.

John Bohannon, Ph.D., is associate professor of finance at Columbus College, a senior unit of the University of Georgia system, in Columbus, Georgia. He has taught courses in all phases of real estate and has published extensively in his area of expertise. Dr. Bohannon holds the GRI designation and has been a real estate broker for some 25 years.

Don Edwards, Ph.D., is professor of accounting at the University of Arkansas at Little Rock. He has published numerous articles on cash management and serves as a consultant to a variety of business firms. Dr. Edwards is a CPA and has prior experience in public accounting.
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Author:Bohannon, John; Edwards, Don
Publication:Journal of Property Management
Date:May 1, 1993
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