Cash Budgets

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:

The cash budget ensures adequate cash planning and control

(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.

Cash summary December 19x0

Proceeds from share issue

600,000

Less Leasehold premises (20 years)

300,000

Plant (est. life 10 years)

80,000

Equipment (est. life 10 years)

160,000

Tools

20,000

Raw materials

10,000

570,000

----------

----------

Cash balance available

30,000
======

You are given the following additional information.

(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

===

===

===

===

===

===

Raw mat. -credit

Direct wages

50

Other expenses

Total

Closing balance

48Cr

40Cr

Students should note that:

(a)

Depreciation never appears in a cash budget as it is a non-cash expense.

(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.

Budgeted Balance Sheet as at 30 June 19x1

Authorised and Issued Capital

600,000 Ord. shares 1 each

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.