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. For determining the timing and magnitude of prospective financial needs.2. Nature of financing (how to finance).3. Determine what point investment (short-term) of excess funds is possible.4. 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 SalesJanuary $50,000 May $70,000February $50,000 June $80,000March $60,000 July $100,000April $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 $300,000 March 19x2 $200,000November

19x2350,000 April 19x2 300,000

December 19x2

400,000 May 19x2 250,000

January 19x2 150,000 June 19x2 200,000February 19x2 200,000 July 19x2 300,000

e. Payments for purchases of merchandise are 80 percent of the following month’s anticipated sales.

f. Wages and salaries are

January $30,000 March $50,000 May $40,000February $40,000 April $50,000 June $35,000

g. Rent is $2,000 a month.h. Interest of $7,500 is due at the end of each calendar quarter.i. A tax repayment on 19x2 income of $50,000 is due in April.j. A capital investment of $30,000 is planned in June.k. 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.)