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Cash Budget

To find out if the company will be in need of cash in the accounting period and to have an
estimate of how much is needed and at what particular period that need will arise, a cash budget
must be prepared. A cash budget shows the expected cash receipts and disbursements for an
accounting period. It can be prepared on a monthly or a quarterly basis for a year.
The cash budget has the following parts:
1. Cash receipts. This includes collections from receivables, proceeds from loans or issuance
of new shares of stocks and advances from stockholders.
2. Cash disbursements. This section includes payments to suppliers and other service
providers, payments for loans and cash dividends.
3. Net cash flow for the period. This is computed by deducting cash disbursements from the
collection for the period. This provides information regarding the excess cash or cash
deficit for the period.
4. Target cash balance. No business can operate without cash. This target cash balance is
the amount of cash that management wants to maintain at all times given its present level
of operations, stability of cash flows, and the macroeconomic and political conditions.
There are primary and secondary reasons for holding cash which will be discussed later.
5. Cumulative excess cash or funding requirements. This is the most important part of the
cash budget where the possible funding requirements are shown on a cumulative basis.
This part of the cash budget is very important in planning because if the management
cash estimate the amount of cash they will need in the future and when it will possibly
arise, this early, management can identify the possible sources of cash. Planning the
possible sources of cash in advance will save the company financing costs and the
unnecessary stress for managers.

A good problem to deal with is cumulative excess cash. If the company has excess cash,
then management can decide where to invest the excess funds to generate more
investment income for the company.

To prepare a cash budget, assumptions have to be made. These assumptions must be

based on the historical performance of the company and plans of the management.
Illustrative Example: It was December 2014 and the president of DCD Corporation wanted to find
out if the company has enough cash to pay the principal balance of the company’s loan worth ₱3
million by the end of 2015. He asked the chief accountant to prepare a cash budget for 2015.
The following assumptions which will be used for the preparation of the cash budget for
2015 are as follows:
1. Projected quarterly sales for 2015 are as follows:
First quarter - ₱5 million
Second quarter - ₱7.5 million
Third quarter - ₱8.5 million
Fourth quarter - ₱10 million
Fourth quarter sales in 2014 was ₱8 million.
Ninety percent of the sales are collected in the quarter the sales are made. The remaining
10% is collected the following quarter.
2. Cost of sales is 75% of sales. Merchandise inventories are purchased in the quarter these
are sold. All merchandise purchased in the quarter are paid in the same quarter.
3. Operating expenses for each quarter paid in cash are as follows:
First quarter - ₱500,000
Second quarter - ₱750,000
Third quarter - ₱850,000
Fourth quarter - ₱1,000,000
On top of these cash operating expenses, depreciation expense to be charged to
operations is ₱150,000 per quarter.
4. Interest expense paid every quarter is ₱75,000.
5. Income tax rate is 30%. The income taxes to be paid every quarter will be as follows:
First quarter - ₱225,000
Second quarter - ₱157,500
Third quarter - ₱270,000
Fourth quarter - ₱315,000
6. Expected cash balance at the end of 2014 is about ₱350,000. For 2015, target cash balance
is raised to ₱500,000 each quarter because of expected increase in sales.

Given the above assumptions, a cash budget can now be prepared for 2015.