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Cash budgeting.


Cash Budgeting

When a business person thinks about budgeting, he or she is usually concerned with estimating income and expenses for a given period in order to determine net profit or loss. This type of budget is used to establish goals and to periodically compare actual figures with the budgeted amounts in order to determine whether the goals are being achieved or whether some changes must be made.

When that same business person goes home to pay personal bills, he or she is concerned with cash flow. Will the pay check cover this month's bills, can some money be put into savings or is a withdrawal necessary? These same questions must be taken back to the business operations and a cash budget should be developed.

A cash budget 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. A cash budget has a variety of uses including:

* Indicating cash needed for

current operations, * Showing the availability of funds

for short or long-term

investments, * Showing the need to borrow

additional funds, and * Indicating whether funds will be

available for business expansion.

A cash budget can also show variances in cash needed due to seasonal sales. It can point out problems in collecting receivables and it can indicate whether cash is available in order to take advantage of purchase discounts.

The first step in preparing a cash budget is estimating cash receipts. All anticipated cash receipts are included: cash sales, collections of accounts receivable, proceeds from sale of assets, interest income, and any amounts received from bank loans. Estimates of cash sales are based on the sales budget. Estimates of accounts receivable collections are based on both the sales budget and the company history of collections. Collections during any given period will be made up of amounts received for current period sales and any collections from prior period sales.

Next the cash disbursements are estimated. Cash used for inventory purchases, materials, salaries, and other current operating expenses as well as for interest expense, loan repayments, asset purchases and any cash dividends must be included.

Timing can be crucial in the budgeting of cash disbursements. If interest on a bank loan or the loan payment is due quarterly this fact must be recognized in a cash budget for the month of payment. A seasonal business will need more cash for inventory purchases during certain months.

And finally, the amount of cash on hand or the minimum bank balance for day to day management of the business must be included in any cash budget. This minimum balance may vary from time to time. It will be larger during high sales periods and may be smaller during slower business periods. Some of the minimum cash may be kept in short term interest earning accounts when immediate cash is not as necessary.

Let's look at an example of a basic cash budget. We will prepare the budget for Holiday Goodies, Inc. for the months of October and November.


The budgeted sales of Holiday Goodies, Inc. for the months of October, November and December are $600,000, $750,000 and $1,200,000 respectively. All sales are on account, with 70% collected in the month of sale and the remaining 30% collected the following month. Accounts receivable of $150,000 at September 30 should be collected in October.


Each month, purchases are budgeted at 60% of the next month's sales. One-half is paid during the month of purchase and the remainder is paid the following month. Unpaid invoices of $180,000 as of September 30 will be paid in October.


Fixed monthly operating expenses are $75,000. Included in this amount is $12,500 of depreciation. Variable costs are 5% of sales each month and are paid during the month.


New equipment has been installed and will be paid for in November. The cost of the equipment is $125,000. A quarterly dividend of $50,000 will be paid to shareholders in October. The cash balance on September 30 is $100,000.

When the financial officer of Holiday Goodies, Inc. looks at the budget analysis (see Table 1), he or she may readily determine that an ending cash balance of $17,500 may prove to be a totally inadequate amount with which to begin the month of December. With $75,000 of monthly fixed expenses plus variable costs and purchase costs, this small balance is hardly sufficient funds. If collection of receivables is slow, there will surely be a timing problem trying to cover operating expenses. Funds may need to be withdrawn from temporary investments or a short term loan may be necessary. A minimum required cash balance must be included when analyzing a cash budget.

It is evident from the illustrated example that not only is financial budgeting a necessary tool for good business management, but a cash budget based on financial expectations is equally essential. No matter how successful operations are, the cash to handle those operations must always be readily available. Many potentially successful business fail because the timing of cash requirements was never considered.

Table 1
 Holiday Goodies, Inc.
 Cash Budget
 October and November
 October November

Cash Receipts

Accounts Receivable
 Prior month sales $150,000 $180,000
 Current month sales 420,000 525,000
 Total 570,000 705,000

Cash Disbursements

 Prior month $180,000 225,000
 Current month 225,000 360,000
 Operating Expenses 92,500 100,000
 Dividend 50,000
 Equipment purchase 125,000
 Total $547,500 $810,000
Cash Increase (decrease) 22,500 (105,000)
Beginning Cash Balance 100,000 122,500
 Ending Cash Balance $122,500 $17,500

December Quiz

Selected Balance Sheet Amounts for Cheery Cards, Inc at September 30 are:
 Accounts Payable $48,750
 Wages Payable 4,550
 Accounts Receivable 58,500
 Prepaid Insurance 6,500
 Interest Payable 35,750

The following expense estimates have been made for the month of October:
 Net Sales $178,750
 Purchases 130,000
 Wage Expense 48,750
 Insurance Expense 3,575
 Interest Expense 3,250

All sales are on a credit basis with 60% collected in the month of sale and 40% collected in the following month. Purchases are paid for 65% in the month of purchase and the remainder in the following month. Wages are paid 75% in the current month and 25% in the following month. Insurance expense is the amortization of the prepaid amount. Interest payable is due in December. Which of the following correctly calculates one of the items of the cash forecase for October?

a. Expected cash receipts from customers is $165,750.

b. Expected cash disbursements for merchandise is $133,250

c. Expected cash payments for wages is $41,113

d. All of the above are correct

Marlyn A. Schwartz Director of Education & Professional Development
COPYRIGHT 1991 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Accounting Scene
Author:Schwartz, Marlyn A.
Publication:The National Public Accountant
Article Type:Column
Date:Dec 1, 1991
Previous Article:Super Client Write-Up.
Next Article:Civil Rights Act of 1991.

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