CASH BUDGET

INRTODUCTION
The cash budget is an accounting device that is used to effectively monitor and
manage the immediate cash flow of a home or business budget. Many people choose
to employ a cash budget approach as a quick and easy way to monitor the financial
condition of the household or a small business on a daily, weekly, or monthly basis.
Generally, cash budgets are used to manage short-term cash flow by creating an
organized means of keeping up with cash receipts and balancing them against cash
disbursements during the accounting period.

Part of the genius of a cash budget is the simplicity of the approach. Often, it is
possible to employ the principle of a cash budget by using a basic spreadsheet.
Creating columns that make it possible to record basic information, it is possible to
tell at a glance how much money came in for the period, and how much went out.
This is accomplished by recording each cash receipt and cash disbursement on the
spreadsheet. Often, the date, amount, and a brief description of the transaction is all
that is necessary.

The cash budget is such a simplistic tool that even people who feel they lack any real
accounting acumen can employ this approach. Because it is possible to track the
cash in and cash out in the same format that is used for a standard check register,
most people will find that the process takes very little time. A simply designed cash
budget will provide a helpful look at how well the entity is doing in staying within the
approved expenses for the period.

DEFINITION

Cash budget is a detailed plan showing how cash resources will be acquired and
used over some specific time period.

Cash budget is composed of four major sections.

1. The receipts section.

2. The disbursements section
3. The cash excess or deficiency section
4. The financing section

The cash receipts section consists of a listing of all of the cash inflows, except for
financing, expected during the budgeting period. Generally, the major source of
receipts will be from sales.

The disbursement section consists of all cash payment that are planned for the
budgeted period. These payments will include raw materials purchases, direct labor
payments, manufacturing overhead costs, and so on as contained in their respective
budgets. In addition, other cash disbursements such as equipment purchase,
dividends, and other cash withdrawals by owners are listed.

The cash excess or deficiency section is computed as follows:

Cash balance beginning XXXX

Add receipts XXXX
--------
XXXX
Total cash available XXXX
Less disbursements --------
XXXX
Excess (deficiency) of cash available over disbursements

If there is a cash deficiency during any period, the company will need to borrow
funds. If there is cash excess during any budgeted period, funds borrowed in
previous periods can be repaid or the excess funds can be invested.

The financing section deals the borrowings and repayments projected to take place
during the budget period. It also include interest payments that will be due on
money borrowed. Generally speaking, the cash budget should be broken down into
time periods that are as short as feasible. Considerable fluctuations in cash balances
may be hidden by looking at a longer time period. While a monthly cash budget is
most common, many firms budget cash on a weekly or even daily basis.

Example of Cash Budget:

Hampton Freeze Inc.

Cash Budget
For the Year Ended December 31, 2009

Quarter

Other budget ref. 1 2 3 4 Year

Cash balance, beginning $42,500 $40,000 $40,000 40,500 42,500

Add receipts:
Collections from customers See sales budget 230,000 480,000 740,000 520,000 1,970,000

------------ ------------ ------------ ------------ ------------

Total cash available 272,500 520,000 780,000 560,500 2,012,500

------------ ------------ ------------ ------------ ------------

Less disbursements:

Direct materials material budget 49,500 72,300 100,050 79,350 301,200

Direct labor Labor budget 84,000 192,000 216,000 114,000 606,000
Manufacturing overhead Overhead budget 68,000 96,800 103,200 76,000 344,000
Selling and Administrative sell. & adm. budget 93,000 130,900 184,750 129,150 537,800

Equipment purchases 50,000 40,000 20,000 20,000 130,000

Dividends 8,000 8,000 8,000 8,000 32,000

------------ ------------ ------------ ------------ ------------

Total disbursements 352,500 540,000 632,000 426,500 1,951,000

------------ ------------ ------------ ------------ ------------

Excess/deficiency of cash available over
(80,000) (20,000) 148,000 134,000 61,500
disbursements

Financing:

Borrowings (at beginning)* 120,000 60,000 - - 180,000

Payments (at beginning) - - (100,000) (80,000) (180,000)

Interest** - - (7,500) (65,00) (14,000)

------------ ------------ ------------ ------------ ------------

Total financing 1200,000 (60,000) (107,500) (86,500) (14,000)

------------ ------------ ------------ ------------ ------------

Cash balance, ending $40,000 $40,000 $40,500 $47,500 $47,500

====== ====== ====== ====== ======

REVIEW OF LITERATURE

IMPORTANCE OF CASH BUDGETING :

Cash budget is an important tool in the hands of financial management for the
planning and control of the working capital to ensure the solvency of the firm.

The importance of cash budget may be summarised as follow:-

(1) Helpful in Planning. Cash budget helps planning for the most efficient use of
cash. It points out cash surplus, or deficiency at selected point of time and enables
the management to arrange for the deficiency before time or to plan for investing
the surplus money as profitable as possible without any threat to the liquidity.

(2) Forecasting the Future needs. Cash budget forecasts the future needs of
funds, its time and the amount well in advance. It, thus, helps planning for raising
the funds through the most profitable sources at reasonable terms and costs.

(3) Maintenance of Ample cash Balance. Cash is the basis of liquidity of the
enterprise. Cash budget helps in maintaining the liquidity. It suggests adequate cash
balance for expected requirements and a fair margin for the contingencies.

(4) Controlling Cash Expenditure. Cash budget acts as a controlling device. The
expenses of various departments in the firm can best be controlled so as not to
exceed the budgeted limit.
(5) Evaluation of Performance. Cash budget acts as a standard for evaluating the
financial performance.

(6) Testing the Influence of proposed Expansion Programme. Cash budget

forecasts the inflows from a proposed expansion or investment programme and
testify its impact on cash position.

(7) Sound Dividend Policy. Cash budget plans for cash dividend to shareholders,
consistent with the liquid position of the firm. It helps in following a sound consistent
dividend policy.

(8) Basis of Long-term Planning and Co-ordination. Cash budget helps in co-
ordinating the various finance functions, such as sales, credit, investment, working
capital etc. it is an important basis of long term financial planning and helpful in the
study of long term financing with respect to probable amount, timing, forms of
security and methods of repayment.

OBJECTIVE OF THE STUDY:

 To ensure that sufficient cash is available whenever required.

 To point out any possible shortage of cash so that necessary steps can be
taken to meet the shortage by making arrangement with the bank for
overdraft or loan.
 To point out any surplus cash so that management can invest it in interest
fetching securities etc.
 To ensure short term liquidity an avoid default in timely discharge of current
liabilities.
 To study sources of funds for various future requirements.
 Thrust is on current assets and liabilities and maintaining cash cushion for
safety.
 It is working capital management activity. It is more of investment planning
activity.

SCOPE OF THE STUDY:

Improving and growing a business requires planning and attention to detail. Create
an overall strategy beginning with a simple cash budget, which provides an
assessment of the business' cash flow. Business owners use a cash budget to track
cash acquisition and disbursements. Using this budgeting tool, the proprietor
anticipates problems associated with delayed collections, capital expenditures and
economic downturns, effectively eliminating a cash crisis that can sink even the most
successful business venture.

Revenue

o Set the cash budget up on a monthly or quarterly basis, whichever

best applies to the scope of the business operations. Preparing the
cash budget begins with an accurate accounting of cash on hand,
 entered in the first column of the receipts portion of the cash budget.
Separate columns might include sales receipts, receipts from credit
collections, and income from investments.

Expenses

o The second set of figures concentrates on disbursements for the

business. Use the same time frame established on the revenue side of
the books. Enter estimates of expenses paid out as cash. Entries may
include materials, labor costs, building overhead, taxes and
equipment. Be realistic when figuring expenses because
undocumented costs could create a negative cash flow situation that
the business may not be equipped to handle effectively.

Finances

o The third section of any comprehensive cash budget covers financing

plans, including repayment intentions and interest charges. This
component of the cash budget could include the financed purchase of
company vehicles, major equipment acquisitions or facility upgrades.
List the planned purchase in the applicable month or quarter. Continue
by logging anticipated repayments in the appropriate time frame. Do
not forget to list interest charges and the month or quarter when
charged.

Considerations

o Cash budget preparation generally follows construction of various

other budgets applicable to the specific business. Use figures from
sales, human resources, production and others to prepare an accurate
analysis of cash flow through the resulting cash budget. Be realistic
when preparing the budget. Impractical sales projections coupled with
underestimating labor costs creates a recipe for cash-flow disaster,
which could adversely impact the company's financial stability. The
cash budget is a living document, which evolves over time as
circumstances warrant. Consistency is key in preserving the integrity
of the document.

Differnce between Cash Flow Statement and Cash Budget:

Cash Flow Statement v/s Cash Budget

1) Cash flow statement is prepared based on past data of income statement and
balance sheet. Cash budget is prepared based on estimates of collection and
outgo of cash.

2) CFS Is historical in nature. CB Is futuristic in nature.

3) CFS is Analytical tool. CB is Planning tool.

4) CFS Is based on real data. CB Is based on estimates.

METHODOLOGY & INSTRUCTIONS TO PREPARE A

CASH BUDGET

(How to Prepare a Cash Budget?)

At its most basic level, a budget is a plan for owners and managers to achieve their goals
for the company during a specific time period. Learn the fundamental concepts of cash
budgets and to evaluate your budget on a month-to-month basis.

What To Expect?

This Business Builder will introduce you to the fundamental concepts of cash budgets
and outline the steps necessary for preparing a cash budget for your business. It will also
show you how to evaluate your budget on a month-to-month basis. This Business Builder
assumes that an income statement and a balance sheet have been prepared for your
business. Information from these financial statements are an integral part of creating a
budget. Without this information, this Business Builder may not be as helpful as it could
be.

What You Should Know Before Getting Started ?

At its most basic level, a budget is a plan. It is a plan for owners and managers to achieve
their goals for the company during a specific time period.

The preparation of a cash budget is an important management task. While some small
businesses may be able to survive for a time without budgeting, savvy business owners
will realize its importance. A cash budget can protect a company from being unprepared
for seasonal fluctuations in cash flow or prepare a company to take advantage of
unexpected quantity discounts from suppliers.

While there are other types of budgets that can be prepared, such as projected or pro
forma financial statements, a cash budget is a management plan for the most important
factor of a company's viability its cash position. A company's cash position determines
how suppliers will be paid, how a banker will respond to a loan request, how fast a
company can grow, as well as directly influencing dividends, increases to owner's equity,
and profitability.

Many Small Businesses Find It Helpful To Prepare Monthly Cash Budgets And To
Analyze Any Variances Between The Budgeted And Actual Amounts On A Monthly
Basis. This enables small business owners and managers to stay on top of any unexpected
cash uses.
watch out for The creation of a cash budget requires you to make estimates (or best
guesses) about many different aspects of your company and the environment in which it
operates. Future sales will be contingent on many things, not the least of which is
competition, the local economic climate and your own internal operations and capacity.
In addition, after sales are estimated, potential costs must also be derived. The important
thing to keep in mind while arriving at these figures is that past experience is important,
but so is intuition. The estimates you will need to develop must be based in reality and
yet contain a dose of creativity and, if warranted, optimism.

There are budgets, other than the cash budget, that are important for your company.
However, the cash budget is a good first step if you are new to budgeting.

A cash Budget Cannot Be Created In A Vacuum. Before and during the budgeting
process, business owners must consult with line managers, suppliers, and key personnel
to make the best guess possible about the relationship between the goals for the period
and their effect on cash receipts and cash expenditures.

Why Prepare A Cash Budget?

A cash budget is important for a variety of reasons. For one, it allows you to make
management decisions regarding your cash position (or cash reserve). Without the type of
monitoring imposed by the budgeting process, you may be unaware of the cycle of cash
through your business. At the end of a year or a business cycle, a series of monthly cash
budgets will show you just how much cash is coming into your company and the way it is
being used. Seasonal fluctuations will be made clear.

A cash budget also allows you to evaluate and plan for your capital needs. The cash
budget will help you assess whether there are periods during your operations cycle when
you might need short-term borrowing. It will also help you assess any long-term
borrowing needs. Basically, a cash budget is a planning tool for management decisions.

How To Create A Cash Budget?

There are three main components necessary for creating a cash budget. They are:

• Time period
• Desired cash position
• Estimated sales and expenses

Time Period

The first decision to make when preparing a cash budget is to decide the period of time
for which your budget will apply. That is, are you preparing a budget for the next three
months, six months, twelve months or some other period? In this Business Builder, we
will be preparing a 3-month budget. However, the instructions given are applicable to any
time period you might select.
Cash Position

The amount of cash you wish to keep on hand will depend on the nature of your business,
the predictability of accounts receivable and the probability of fast-happening
opportunities (or unfortunate occurrences) that may require you to have a significant
reserve of cash.

You may want to consider your cash reserve in terms of a certain number of days' sales.
Your budgeting process will help you to determine if, at the end of the period, you have
an adequate cash reserve.

Estimated Sales And Expenses

The fundamental concept of a cash budget is estimating all future cash receipts and cash
expenditures that will take place during the time period. The most important estimate you
will make, however, is an estimate of sales. Once this is decided, the rest of the cash
budget can fall into place.

If an increase in sales of, for example, 10 percent, is desired and expected, various other
accounts must be adjusted in your budget. Raw materials, inventory and the costs of
goods sold must be revised to reflect the increase in sales. In addition, you must ask
yourself if any additions need to be made to selling or general and administrative
expenses, or can the increased sales be handled by current excess capacity? Also, how
will the increase in sales affect payroll and overtime expenditures?

Instead of increasing every expense item by 10 percent, serious consideration needs to be

given to certain economies of scale that might develop. In other words, perhaps, a
supplier offers a discount if you increase the quantities in which you buy a certain item
or, perhaps, the increase in sales can be easily accommodated by the current sales force,
all of these types of considerations must be taken into account before you start budgeting.
Each type of expense (as shown on your income statement) must be evaluated for its
potential to increase or decrease. Your estimates should be based on our experience
running your business and on your goals for your business over the time frame for which
the budget is being created. At a minimum, the following categories of expected cash
receipts and expected cash payments should be considered:

• Cash balance
o Expected cash receipts:
o Cash sales
o Collections of accounts receivable
o Other income
• Expected cash expenses:
o Raw material (inventory)
o Payroll
• Other direct expenses:
o Advertising
 o Selling expenses
o Administrative expense
o Plant and equipment expenditures
o Other payments

Following Is A Description Of Each Line Item:

cash balance. The cash balance is your cash on hand. This includes what is in your
checking accounts, savings accounts, petty cash and any other cash accounts that you
might have.

cash sales. After arriving at a base figure of cash sales, it must be adjusted for any trade
or other discounts and for possible returns. As stated previously, the base level of sales
(and of accounts receivable) will be determined by the company's projections, goals and
past experience.

collections of accounts receivable. After a base level of accounts receivable is

established (based on sales projections), it must be adjusted to reflect the amount that will
actually be paid during the time period. Typical adjustments for a small business might
be to assume that 90 percent of accounts receivable will be collected in the quarter in
which the sales occur, 9 percent will be collected in the following quarter, and 1 percent
will remain uncollectible. Of course, past experience will be the most reliable indicator
for making these adjustments.

other income. Your cash position may be affected positively by income other than that
received from sales. Perhaps there are investments, dividends, or an expected borrowing
that will be introducing cash to the company during the time period. These types of cash
sources are referred to as "other income."

Expected Cash Expenses:

• Raw Materials (inventory).

• For small business retailers and manufacturers, the largest cash expense is usually
the amount spent for inventory or raw materials. Again, past experience will be
your best indicator of future cash outlays. But don't forget to factor in any
necessary increases to keep up with projected sales. You may also want to consult
with your suppliers as to whether any pricing changes are expected.
• Payroll.
• Salaries are commonly the second largest expense item during an accounting
period. Don't forget to include estimates for all appropriate local, state, and
federal taxes.
• Other Direct Expenses.
• Use this line item for any additional expense that does not fit conveniently under
the other headings. If you are making payments on a loan, include it here.
• Advertising.
 • The role of advertising varies by type of business. If you are projecting an
increase in sales, is there an accompanying marketing or advertising campaign?
These costs must be budgeted. Include any expenses for print (brochures, mailers,
and newspaper ads), radio, or other advertising services.
• Selling Expenses.
• Typical selling expenses include salaries and commissions for sales personnel and
sales office expenses. However, this line item can also include any traveling or
other sales-related expense not covered elsewhere.
• Administrative Expenses.
• General office expenses are included here. This will include your utilities,
telephone, copying and day-to-day office expenses. Unless big changes are
underway, past experience will guide you in evaluating future administrative
expenses.
• Plant And Equipment.
• Cash payments for equipment loans, mortgages, repairs, or other upkeep should
be included here. Past experience will, again, be your guide.
• Other Payments.
• If there are any cash payments you expect to make that are not covered in the
above listing, include them here. (If they are repeatable, you may consider adding
a separate line item.) However, typically, interest payments and taxes fall here.

Here Is An Example Of A Cash Budget For A Small Business:

SMALL BUSINESS CASH BUDGET

For the three months ending March 31, 200x

Item Jan Feb March

Beginning cash balance 15,000 -13,500 20,000

Expected Cash Receipts:

Cash Sales 20,000 25,000 30,000
Collection of accounts receivable 45,000 55,000 70,000
Other income 0 0 5,000
Total cash collected 80,000 66,500 125,000

Expected cash payments:

Raw materials (or inventory) 50,000 11,000 5,000
Payroll 10,400 10,400 10,400
Other direct expenses 2,000 2,000 2,000
Advertising 10,000 0 0
Selling expense 6,000 8,000 6,000
 Administrative expense 4,500 4,500 4,500
Plant and equipment expenditures 10,000 10,000 10,000
Other payments 600 600 600
Total cash expenses 93,500 46,500 38,500
Cash surplus (or deficit) -13,500* 20,000* 86,500

* The ending cash balance becomes the beginning cash balance for the next period.

Step 1: Create A Cash Budget For Your Company For A Three Month Period.

Step 2: If The Data Is Available, Construct A Budgeted Versus Actual Report For
Your Business.

How To Analyze A Cash Budget?

The preparation of a cash budget is only the first step toward good financial management.
The next step is to analyze to see how close the company is performing to expectations.
Have any unexpected cash outflows occurred? If so, is the company's financial position
seriously affected?

A simple method for monitoring the cash budget is to prepare a budget-versus-actual

report of actual and budgeted expenses every month. This type of report consists of three
columns. The first column shows the budgeted amounts, the second column shows actual
company performance, and the third column shows the difference in terms of a percent.

Below is a sample month-end budget report for the fictional Turtle Company.

Budget Versus Actual Report

For May 200x

Item Budget Actual Variance

Cash balance 5,000 5,000 0%

Cash Receipts:
Cash sales 20,000 22,000 110%
Collection of accounts receivable 15,000 13,500 90%
Other income 0 0
Total cash 40,000 40,500 101%

Cash payments:
Raw materials (or inventory) 15,000 15,000 100%
 Payroll 7,200 9,400 130%
Other direct expenses 500 500 100%
Advertising 500 1,000 200%
Selling expense 1,500 1,400 93%
Administrative expense 500 500 100%
Plant and equipment expenditures 5,000 7,500 150%
Other payments 0 0
Total cash expenses 30,200 35,300 116%
Cash surplus (or deficit) 9,800 5,200 53%

As you can see, cash expenses for payroll, advertising and plant and equipment exceeded
the budgeted amounts for the Turtle Company. But because the company analyzes these
figures monthly, changes can be made before the increased expenses become
unmanageable. The use of an budget vs. actual report allows owners to pinpoint how
actual cash inflows and outflows vary from expectations and to make adjustments.

Conclusion

This Business Builder focuses on the creation of a cash budget for your business. While
there are several other types of budgets that can be prepared, small business owners
should pay close attention to their cash position and create a cash budget for their
company. Preparing a monthly budget vs. actual report will give small business owners
the information they need to make important decisions about the cash position of their
company.

Checklist

When preparing your cash budget, did you remember to make the ending cash balance
the beginning cash balance for the next period?

When estimating cash expenses, did you remember to factor any additional material,
labor or other expenses for projected sales?

Is your sales goal for the period realistic?

Did you remember to adjust accounts receivable for possible uncollectible amounts?

Do expenditures for payroll include taxes?

DATA SOURCES