What Does Cash Budget Mean?

An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities. Investopedia explains Cash Budget A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems. For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs. For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive. However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things. If you frequently visit specialty coffee shops, your annual expenditure will be substantially more.

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A forecast of estimated cash receipts and disbursements for a specified period of time.

Cash Budget | Cash Budgeting: Learning Objectives: 1. Define and explain a cash budget. 2. What is the purpose of a cash budget 3. How to prepare a cash budget. Definition and Explanation: 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 forfinancing, 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 Add receipts Total cash available Less disbursements Excess (deficiency) of cash available over disbursements XXXX XXXX -------XXXX XXXX -------XXXX

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: (See explanation of this budget) Hampton Freeze Inc. Cash Budget For the Year Ended December 31, 2009 Quarter Other budget 1 2 3 4 Year ref. Cash balance, $42,50 $40,00 $40,00 40,500 42,500 beginning 0 0 0 Add receipts: See Collections from 230,00 480,00 740,00 520,00 1,970,0 sales customers 0 0 0 0 00 budget ---------- --------- ---------- --------- ----------------Total cash 272,50 520,00 780,00 560,50 2,012,5 available 0 0 0 0 00 ---------- --------- ---------- --------- ----------------Less disbursements: material 100,05 Direct materials 49,500 72,300 79,350 301,200 budget 0 Labor 192,00 216,00 114,00 Direct labor 84,000 606,000 budget 0 0 0

Manufacturing overhead Selling and Administrative Equipment purch ases Dividends

Overhe 103,20 ad 68,000 96,800 76,000 344,000 0 budget sell. & 130,90 184,75 129,15 adm. 93,000 537,800 0 0 0 budget 50,000 40,000 20,000 20,000 130,000 8,000 8,000 8,000 8,000 ---------- --------- ---------- --------------352,50 540,00 632,00 426,50 0 0 0 0 ---------- --------- ---------- --------------32,000 ----------1,951,0 00 -----------

Total disbursements

Excess/deficienc y of cash available over disbursements Financing: Borrowings (at beginning)* Payments (at beginning) Interest**

(80,000 (20,00 148,00 134,00 61,500 ) 0) 0 0

120,00 60,000 0 -

180,000

Total financing

Cash balance,

(100,00 (80,00 (180,00 0) 0) 0) (14,000 (7,500) (65,00) ) ---------- --------- ---------- --------- ----------------1200,0 (60,00 (107,50 (86,50 (14,000 00 0) 0) 0) ) ---------- --------- ---------- --------- ----------------$40,00 $40,00 $40,50 $47,50 $47,500

ending

0 0 0 0 ===== ===== ===== ===== ====== = = = =

*The company requires a minimum cash balance of $40,000. Therefore, borrowing must be sufficient to cover the cash deficiencies of $80,000 in quarter 1 and to provide for the minimum cash balance of $40,000. All borrowings and repayments of principal are in round $1,000 amount. **The interest payment relate only to the the principle being repaid at the time it is repaid. For example, the interest in quarter 3 relates only to the interest due on the $100,000 principle being repaid from quarter 1 borrowing: $100,000 10% per year 3/4 year = $7,500 The interest paid in quarter 4 is computed as follows: $20,000 10% per year 1 year $60,000 10% per year 3/4 year Total interest paid Explanation of cash budget for Hampton Freeze Inc. Cash budget builds on the other budgets ( sales budget, material budget, Labor budget, Overhead budget, sell. & adm. budget) and on some additional data that are provided below:

$2,000 4,500 --------$6,500 ======

The beginning cash balance is $42,500

Management plans to spend $130,000 during the year on equipment purchases: $50,000 in the first quarter; $40,000 in the second quarter; $20,000 in the third quarter; $20,000 in the fourth quarter. The board of directors has approved cash dividends of $8,000 per quarter. Management would like to have a cash balance of at least $40,000 at the beginning of each quarter for contingencies. Assume Hampton Freeze will be able to get agreement from a bank for an open line of credit. This would enable the company to borrow at an interest rate of 10% per year. All borrowings and repayments would be in round $1,000 amount. All borrowings would occur at the beginning of the quarters and all repayments are made and only on the amount of principal that is repaid.

The cash budget is prepared one quarter at a time, starting with the first quarter. Management began the cash budget by entering the beginning balance of cash for the first quarter of $42,500--a number that is given above. Receipts--in this case, just the $230,000 in cash collection from customers--are added to the beginning balance to arrive at the total cash available of $272,500. Since the total disbursements are $352,500 and the total cash available is only $272,500, there is short fall of $80,000. Since management would like to have a beginning cash balance of at lease $40,000 for the second quarter, the company would need to borrow $120,000. Required borrowing at the end of the first quarter Desired ending cash balance $40,000

Plus deficiency of cash available over disbursements Required borrowings

80,000 ---------$120,000 ======

The second quarter of cash budget is handled similarly. Note that the ending cash balance of the first quarter is brought forward as the beginning cash balance for the second quarter. Also note that additional borrowing is required in the second quarter because of the continued cash shortfall. Required borrowing at the end of the second quarter Desired ending cash balance $40,000 Plus deficiency of cash available over disbursements 20,000 -----------Required borrowings $60,000 ====== In third quarter, the cash flow situation improves dramatically and the excess of cash available over disbursement is $148,000. This makes it possible for the company to repay part of its loan from the bank, which now totals $180,000. How much can be repaid? The total amount of the principle and interest that can be repaid is determined as follows: Total maximum feasible loan payments at the end of the third quarter Excess of cash available over disbursement $148,000 Less desired ending cash balance 40,000 ------------Maximum feasible principle and interest payment $108,000 ======

The next step--figuring out the exact amount of loan payment--is tricky since interest must be paid on the principle amount that is repaid. In this example, the principle amount that is repaid must be less than $108,000, so we know that we would be paying of part of the loan that was taken out at the beginning of the first quarter. Since the repayment would be made at the end of the third quarter, interest would have accrued for three quarters. So the interest owed would be 3/4 of 10% or 7.5%. Either a trial and error or an algebraic approach will lead to the conclusion that the maximum principle repayment that can be made is $100,000. The interest payment would be 7.5% of this amount, or $7,500--making the totalpayment $107,500. In the fourth quarter, all of the loan and accumulated interest are paid off. If all loans are not repaid at the end of the year and budgeted financial statements are prepared, then interest must be accrued on the unpaid loans. This interest will not appear on the cash budget (since it has not yet been paid), but it will appear as interest expense on the budgeted income statement and as a liability on the budgeted balance sheet. As with the production budget and raw materials budget, the amounts under the year column in the cash budget are not always the sum of the amounts for the four quarters. In particular, the beginning cash balance for the year is the same as the beginning cash balance for the first quarter and the ending cash balance for the year is the same as the ending cash balance for the fourth quarter.

Burlington Northern Fe (BNSF) operates the second largest railroad in the United States. The company's senior vice president, CFO, and treasure is Tom Hunt, who reports that "as a general theme, we have become very cash-flow oriented." After the manager of the Burlington Northern and Santa Fe railroads, the company went through a number of years in which they were investing heavily and consequently had negative cash flow. To keep on top of the company's cash position, Hunt has a cash forecast prepared every month. "Everything falls like dominoes from free cash flows," Hunt says. "It provides us with alternatives." Right now, the alternative of choice is buying back our own stock...[b]ut it could be increasing dividends or making acquisitions. All those things are not even on the radar screen if you don't have free cash flow." Source: Randy Myers, "Cash Crop: The 2000 working capital survey," CFO, August 2000, pp. 59-82. You may al Cash budget: a cash plan for a defined period of time. It summarises monthly receipts and payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses are: to maintain control over a firm's cash requirements, e.g. stock and debtors to enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises to show the feasibility of management's plans in cash terms to illustrate the financial impact of changes in management policy, e.g. change of credit terms offered to customers.

Receipts of cash may come from one of the following: cash sales payments by debtors the sale of fixed assets the issue of new shares the receipt of interest and dividends from investments. Payments of cash may be for one or more of the following: purchase of stocks payments of wages or other expenses purchase of capital items payment of interest, dividends or taxation. Steps in preparing a cash budget i) Step 1: set out a pro forma cash budget month by month. Below is a suggested layout. Month 1 Month 2 Month 3 $ $ $ Cash receipts Receipts from debtors Sales of capital items Loans received Proceeds from share issues Any other cash receipts Cash payments Payments to creditors Wages and salaries Loan repayments Capital expenditure

Taxation Dividends Any other cash expenditure Receipts less payments Opening cash balance b/f W X Closing cash balance c/f

X Y

Y Z

ii) Step 2: sort out cash receipts from debtors iii) Step 3: other income iv) Step 4: sort out cash payments to suppliers v) Step 5: establish other cash payments in the month Figure 4.1 shows the composition of a master budget analysis. Figure 4.1 Composition of a master budget OPERATING BUDGET FINANCIAL BUDGET consists of:consists of Budget P/L acc: get: Cash budget Production budget Balance sheet Materials budget Funds statement Labour budget Admin. Budget Stocks budget f) Other budgets: These include budgets for: administration research and development selling and distribution expenses

 capital expenditures working capital (debtors and creditors). The master budget (figure 4.1) illustrates this. Now attempt exercise 4.1. Exercise 4.1 Budgeting I Different The cash budget contains an itemization of the projected sources and uses of cash in a future period. The inputs to the cash budget come from several other budgets. The results of the cash budget are used in the financing budget, which itemizes investments, debt, and both interestincome and interest expense. The cash budget is comprised of two main areas, which are Sources of Cash and Uses of Cash. The Sources of Cash section contains the beginning cash balance, as well as cash receipts from cash sales, accounts receivable collections, and the sale of assets. The Uses of Cash section contains all planned cash expenditures, which comes from the Direct Materials Budget, Direct Labor Budget, Manufacturing Overhead Budget, and Selling and Administrative Expense budget. It may also contain line items for fixed asset purchases and dividends to shareholders. If there are any unusually large cash balances indicated in the cash budget, these balances are dealt with in the financing budget, where suitable investments are indicated for them. Similarly, if there are any negative balances in the cash budget, the financing budget

indicates the timing and amount of any debt or equity needed to offset these balances. Example of the Cash Budget Here is an example of the cash budget, showing the sources and uses of cash by week: Everson Manufacturing Cash Budget Beginning cash Sources of Cash + Cash sales + Accounts receivable collected + Asset sales = Total cash available Uses of Cash - Direct materials - Direct labor - Manufacturing overhead - Selling & administrative - Asset purchases - Dividend payments = Total uses of cash Net Cash Position Week 1 $25,000 +10,000 +180,000 +30,000 $245,000 -$87,000 -19,000 -29,000 -35,000 Week 2 $55,000 +12,000 +185,000 0 $252,000 -$91,000 -20,000 -30,000 -35,000 Week 3 -$24,000 +15,000 +180,000 +10,000 $181,000 Week 4 -$63,000 +18,000 +192,000 +25,000 $172,000

-$99,000 -$107,000 -23,000 -25,000 -34,000 -37,000 -38,000 -38,000

-20,000 0 -50,000 0 0 -100,000 0 0 -$190,000 -$276,000 -$244,000 -$207,000 $55,000 -$24,000 -$63,000 -$35,000

The example shows that an inordinately large dividend payment in the second week of the cash budget, coupled with a large asset purchase in the following week, places

the company in a negative cash position. Paying out such a large dividend can be a problem for lenders, who do not like to issue loans so that companies can use the funds to pay their shareholders and thereby weaken their ability to pay back the loans. Thus, it may be wiser for the company to consider a small dividend payment and avoid a negative cash position. Other Cash Budget Issues Cash balances may fluctuate considerably within a single accounting period, thereby masking cash shortfalls that can put a company in serious jeopardy. To spot these issues, it is quite common to create and maintain cash forecasts on a weekly basis. Though these short-term budgets are reasonably accurate for perhaps a month, the precision of forecasting declines rapidly thereafter, so many companies then switch to budgeting on a monthly basis. In essence, a weekly cash budget begins to lose its relevance after one month, and is largely inaccurate after two months. Related Topics

Different Cash Budgeting and How to Use it: Within the broad category of business budgeting, the owner of the small business may want to do some specialized budgeting with regard to cash flow. One type of budget that is practically necessary to the survival of the business firm is cash budgeting. Short-term financial planning

The cash budget is one of the primary tools used in short-term financial planning in order to plan for cash flow. It is often developed on a monthby-month basis. A good cash budget allows the owner to see short-term financial needs and opportunities for the business. One month, the firm may have extra cash and may be able to save some money in a money market fund or take advantage of a bargain in the marketplace. Another month, the firm may have a shortfall and have to withdraw some money from savings or even apply for a short-term bank loan to cover its needs. You can see by looking at this explanation of a cash budget how owners state their expected cash inflows (sales revenues) and outflows (expenditures) on a month-by-month basis in order to calculate their excess cash or cash shortage at the end of each month. This is an extraordinarily helpful short-term planning tool for the small business owner. Financial Forecasting Cash budgeting is the second step in the firm's financial forecasting process.

Different Cash is the gasoline that makes your business run. Cash flow can be defined as the way money moves into and out of your business; it is the difference between just being able to open a business and being able to stay in business. A cash flow analysis is a method of checking up on your firms financial health. It is the study of the movement of cash through your business, called a cash budget, to determine patterns of how you take in and pay out money. The goal is to maintain sufficient cash for firm operations from month to month. This type of cash flow analysis is called developing the cash budget. Difficulty: Average Time Required: 3 hours

Here's How: 1. This type of cash flow analysis is called cash budgeting analysis. It is part of your firm'sfinancial forecasting plan. Determine the amount of cash that will flow into your firm during the month. If you are just starting your business, you should include the beginning balance in cash that you want to have available every month. There would also be the amount of sales you have during the first month. Sales would include both cash sales and sales that you make to your customers who pay on credit. Here's an exampleyou can follow to develop your Schedule of Cash Receipts (Sales Receipts). 2. Determine the amount of cash that will flow out of your firm during the month. You will have expenses. You will probably have to buy office supplies. Other monthly expenses may include advertising, vehicle expenses, payroll expenses, just to name a few. You will have some quarterly expenses, such as taxes. You may have expenses that just occur occasionally, like purchases of computer equipment, vehicles, or other larger expenses. Here is anexample of a Schedule of Cash Payments that is the second step of the cash budget. 3. You want the cash that will flow into your firm (Step 1) to be greater than the cash that will flow out of your firm (Step 2). This means that your monthly cash inflow needs to be greater than your monthly cash outflow so you will have sufficient cash to operate your firm. Here's a blank worksheet you can use to calculate your cash inflow or cash receipts and another blank worksheetyou can use to calculate your cash payments. 4. Your ending balance for the first month becomes the beginning balance for the second month. You do the same type of analysis. Each month, you may have to add more items to your cash flow analysis as your business grows. You need to decide what the minimum ending cash balance is that you find acceptable for your firm and aim toward that figure each month.

5. If your cash flow turns negative for any one month, you will have to borrow money for that month from family or friends, investors, or from a bank or other financial institutions. Then, if your cash flow is positive the next month, you can repay that loan. 6. Keep on doing this each month for your forecasting period. Try to keep your borrowing to a minimum and your cash inflow greater than your outflows. Remember that this cash budget is a financial forecasting document but try to follow it as closely as possible. Here is an example of a completed Cash Budget, based on the schedules already completed, that you can look at. Here is a blank worksheet you can use for your own company. Different Small business owners can't just assume that just because they can show a forecasted profit for their business that all is well. Profit is not the same as cash in the till. Cash on hand is necessary to operate day to day operations. As a result, small business owners also must develop a projected cash budget in order to assure that they will have adequate cash in the future to operate their firm. Cash budgets are usually done on a monthly basis. Cash receipts or inflows, which are usually sales revenue, are projected based on the sales projections from the projected income statement. Cash expenditures or outflows are similarly projected. The difference between them is the net cash flow. The business owner has to take into consideration whether or not he allows customers to pay on credit and control for that when calculating when cash inflows are received. Each month, the small business owner then calculates if there will be enough cash to meet the minimum cash balance and the firm's cash needs for the month. If not, the owner will have to borrow. If there is excess cash, the owner can repay past loans. In this way, the business owner can keep a good handle on the cash position of the firm.

The Purpose of a Cash Budget 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 companys viability its cash position. A companys 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 owners 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. 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, such as 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 cash flow 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. Time period Desired cash position Estimated sales and expenses how to prepare a cash budget

Here is an example of a cash budget for a small business: Small Business Cash Budget For the three months ending March 31, 2000

Beginning Cash Balance Expected Cash Receipts:

Cash sales Collection of accounts receivable Other income Total Cash Expected Cash Payments: Raw materials (or inventory) Payroll Other direct expenses Advertising Selling expenses Administrative expenses Plant and equipment expenditures Other payments Total Cash Expenses Ending Cash Balance

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 three-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. For example, if an increase in sales of 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 your 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: Expected Cash Receipts: Cash balance Cash sales Collections of accounts receivable Other income Expected Cash Expenses: Raw material (inventory)

 Payroll Other Direct Expenses: Advertising Selling expenses Administrative expense Plant and equipment expenditures Other payments Expected Cash Receipts: 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 companys 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, nine percent will be collected in the following quarter, and one 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 sales. Perhaps there are investments, dividends, or a loan 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 dont 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. Dont 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.

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 companys 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 four columns. The first column shows the budgeted amounts, the second column shows actual company performance, and the third and fourth columns show the difference in terms of dollars and percent. Step 2: If the data is available, construct a budget versus actual report for your business. Below is a sample month-end budget versus actual report for the fictional Turtle Company:

Budget vs. Actual Report Cash Balance Cash Receipts:

Cash sales Collection of accounts receivable Other income Total Cash Expected Cash Payments: Raw materials (or inventory) Payroll Other direct expenses Advertising Selling expense Administrative expense Plant and equipment expenditures Other payments Total cash expenses Ending Cash Balance BUDGET $5,000 20,000 15,000 0 $40,000

15,000 7,200 500 500 1,500 500 5,000 0 30,200 $9,800 ACTUAL $5,000 22,000 13,500 0 $40,500 15,000 9,400 500 1,000 1,400

500 7,500 0 35,300 $5,200 % Variance 0% 110% 90% 0% 101% 0% 130% 0% 200% 93% 0% 150% 0% 116%

53%

As you can see, cash expenses for payroll, advertising and plant and equipment exceeded the budgeted amounts for the Turtle Company. And because the company analyzes these figures monthly, changes can be made before the increased expenses become unmanageable. The use of a budget versus 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 versus 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?

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Budgeting Basics Business Risk Managment Site Map Bizcoach, Small Business Ideas. Budgeting Basics Let's face it- nobody likes budgeting. Most people (especially entrepreneurs) would rather be out doing something, not sitting around trying to predict what's going to happen to next year's financials. The truth is that it is not imperative for every company to have a budget. We have seen many well-run businesses without budgets and we're sure you have, too. However, we do believe that every company (especially growing ones) can improve its performance even further with a basic budgeting process. There are two simple reasons for this. First, from a practical point of view, if your business is growing then you may soon reach the day when you need a budget- to apply for a bank loan, buy a new piece of machinery, raise capital from investors, etc. If that is the case, then it's far better to start a budget now rather than try to pull one together at the last minute. Secondly, a budget is not about predicting the future- it's about making the future. Once you've made the effort to plan and visualize your company's financial results, then achieving them becomes that much more realistic. For more help on your financial planning, use budgeting software that is easy and affordable.

What is a Budget? Whenever you go on a trip, you fill your bag with the clothes, food, and money you'll need. That's the origin of the concept of budgeting- planning your trip and ensuring that you'll have enough resources in your bag to make it to your destination. In just the same way, an organization plans its trips- its strategic objectives- and prepares for the journey with an action plan called a budget. While the budgeting process can get quite complex in large organizations, the starting point for most companies is to focus on two basic budgets: an operating budget and a cash budget. Typically, these budgets are developed to cover a one-year time span. Operating Budget The goal of the operating budget is to provide a blueprint for how the business is going to operate in the coming year. As a result, it pulls together information from functional areas such as design, production, marketing, distribution, and customer service. The end result is a budgeted income statement that shows how much profit the business expects to make at the end of the year. Cash Budget The cash budget is not as intuitive as the operating budget because it is strictly financial. However, it has a vital purpose: to ensure that the business has enough cash to fund its activities throughout the current period. Growing companies often find themselves strapped for cash even though sales are increasing and they are profitable. The goal of the cash budget is to ensure that

you don't run out of cash. (For further help, see belowSeven Steps for Preparing a Cash Budget.) The Key To Success For example, let's say you are a food manufacturer and after the first three months of the year you want to evaluate how sales are proceeding. After reviewing the data, you discover that overall sales are lower than expected. Upon further research, you find that one of your product lines is 25% below budget due to a special promotion that your main competitor began offering to customers. This is where you would concentrate your corrective action because customers seem to be responding to the promotion, buying more product from your competitor and less from you. Six Steps for Preparing an Operating Budget 1) Review prior period data. Use historical data as a starting point. If possible, review your results for the past two or three years. Unless you are starting a new business or developing a new product (in which case there is no data to review), this will be the best indication of what's going to happen in the next year. 2) Develop reasonable assumptions. After reviewing the data, you develop assumptions about the future. Trust your own experience and make educated guesses. What will sales growth be? Is the market for your products or services expanding? How effective will your marketing program be? What will your competitors do? Most business owners have strong sense of intuition about these things- listen to it, don't

overanalyze. You can also gather information from trade journals or by talking with the people in your company who are close to the scene (members of the sales team, purchasing staff, etc.). 3) Determine expected revenues. Use your prior period data and assumptions to make sales projections. Some companies establish a target that is realistic and attainable, others prefer a "stretch" budget that will be difficult, but not impossible, to achieve. However, it is important to keep your projections reasonable- within the constraints of production capacity or a limited sales force on the one hand, and customer demand on the other. Expected revenues include not only the number of products you expect to sell, but also at what price you will sell. If you plan to increase the price, do you expect customers to continue to buy at the higher price, or will sales decrease by some degree? 4) Calculate the expected cost of goods sold. When calculating the cost of goods sold, be sure to include all direct and indirect costs: material, labor, packaging, storage, etc. Also, don't forget to take beginning inventory into account. 5) Calculate expected operating expenses. This includes fixed costs such as rent, salaries, utilities, office supplies, etc. 6) Calculate expected operating Presto, there's your operating budget. income.

Seven Steps for Preparing a Cash Budget 1) Determine the beginning cash balance. Figure out how much cash will be available at the beginning of the period (year, quarter or month). 2) Add cash receipts. Determine the expected receipts- collections from customers- that will flow into the cash account each period. Cash collections may vary during the budget period. For example, many retail stores expect to receive most of their receipts during holiday seasons. 3) Deduct cash disbursements. Based on expected activity, calculate how much cash will be required to cover disbursements- cash payoutsduring the period. Disbursements could include payment for materials, rent, payroll, taxes due, and so on. Some of these expenditures may be evenly distributed throughout the budget period, but some (such as material costs) may fluctuate as part of the production process. 5) Calculate the cash excess or deficiency. To calculate the cash excess or deficiency for a period, subtract the disbursement from the sum of the beginning cash balance and the receipts expected during that period. 6) Determine financing needed for the period. To calculate the cash excess or deficiency for a period, subtract the total disbursements from total cash available. If, at the end of the period, there is a cash excess, then financing of operations may be covered by the available cash. If, on the other hand, there is a cash

deficiency, then you have to plan on financing the periods cash needs from other sources, such as a bank loan or additional capital contribution. Note: remember to include a stable cash balance beyond the immediate cash needs. For example, a manufacturer may want to maintain a $20,000 cash balance at all times to cover unexpected cash demands. 7) Establish the ending cash balance. The ending cash balance for each period will include the receipts and loans less the disbursements and financing costs. The ending cash balance becomes the beginning cash balance for the next period.