CASH BUDGETING

To help plan for short-term financing.

To know the position of future cash inflows and outflows.
Reveals the amount and timing of expected cash flows over the period studied.

USES:
1.
2.
3.
4.

For determining the timing and magnitude of prospective financial needs.

Nature of financing (how to finance).
Determine what point investment (short-term) of excess funds is possible.
To exercise control over cash and liquidity.

STEPS IN THE PREPARATION OF CASH BUDGET:

1. Prepare a schedule of sales receipts (Total Sales Receipt = Cash sales + Collection
of credit sales)
2. Prepare a schedule of total cash receipts (Total Cash Receipts = Sales receipts +
Sale of assets + Sale of securities + other sources of income + Loans)
3. Prepare a schedule of cash expenses (Cash expenses from operations) includes
purchases, wages and salaries, rent, other operating expenses.
4. Prepare a schedule of total cash disbursements (Cash expenses + capital expenses
+ dividends + purchase of securities / investment + payment of principal and interest
+ taxes)
5. Prepare the net cash flow table (Net Cash flow = Total cash receipts Total cash
disbursements)
Sample Problem for Cash Budgeting:
1. Prepare a cash budget for the Ace Manufacturing Company indicating receipts and
disbursements for May, June, and July. The firm wishes to maintain a minimum cash
balance of $20,000 at all times. Determine whether or not borrowing will be necessary
during the period, and if it is, when and for how much. As of April 30, the firm had a
balance of $20,000 in cash.
Actual Sales
Forecasted Sales
January
$50,000
May
$70,000
February
$50,000
June
$80,000
March
$60,000
July
$100,000
April
$60,000
August
$100,000
Accounts Receivable: 50% of total sales are for cash. The remaining 50% will be
collected equally during the following 2 months (the firm incurs a negligible bad debt
loss).
Cost of Goods Manufactured: 70% of sales, 90% of this cost is paid during the first
month after incurrence, the remaining 10% is paid the following month.

Sales and Administrative Expenses: $10,000 per month plus 10% of sales. All of these
expenses are paid during the month of incurrence.
Interest Payments: Semi-annual interest of $18,000 is paid during July. An annual
$50,000 sinking fund payment is also made at that time.
Dividends: A $10,000 dividend payment will be declared and made in July.
Capital Expenditures: $40,000 will be invested in plant and equipment in June.
Taxes: Income tax payments of $1,000 will be made in July.
2. Given the information that follows, prepare a cash budget for the Central City
department Store for the first 6 months of 19x2 under the following assumptions:
a. All prices and costs remain constant.
b. Sales are 75 percent for credit and 25 percent for cash.
c. In terms of credit sales, 60 percent are collected in the month after the sale, 30
percent in the second month, and 10 percent in the third. Bad-debt losses are
insignificant.
d. Sales, actual and estimated are
October 19x1
November
19x2
December
19x2
January 19x2
February 19x2

$300,000
350,000

March 19x2
April 19x2

$200,000
300,000

400,000

May 19x2

250,000

150,000
200,000

June 19x2
July 19x2

200,000
300,000

e. Payments for purchases of merchandise are 80 percent of the following months

anticipated sales.
f. Wages and salaries are
January
February
g.
h.
i.
j.
k.

$30,000
$40,000

March
April

$50,000
$50,000

May
June

$40,000
$35,000

Rent is $2,000 a month.

Interest of $7,500 is due at the end of each calendar quarter.
A tax repayment on 19x2 income of $50,000 is due in April.
A capital investment of $30,000 is planned in June.
The company has a cash balance of $100,000 at December 31, 19x1, which is
the minimum desired level for cash. Funds can be borrowed in multiples of
$5,000 on a monthly basis. (Ignore interest on such borrowings.)