Cash Budgets A cash budget helps a business manage its cash by expressing the plan for the receipt

and payment of cash during a future period. The cash budget has its roots in the statement of cash flows in the sense that it tracks projected cash inflows and outflows as opposed to actual inflows and outflows. Steps of a Cash Budget 1. Start with the entity s cash balance at the beginning of the period. !this is the closing cash balance from the pre"ious period and represents how much was left o"er from the pre"ious period# $. Add budgeted cash receipts and subtract budgeted cash payments. !%anagers ha"e to predict the cash effect of all transactions of the budget period including& a# re"enue and expense transactions b# asset ac'uisition and sale transactions c# liability and owner e'uity transactions (. Beginning Cash Balance ) *xpected +eceipts , *xpected -ayments . *xpected Cash Balance at the end of the period. /. Compare the expected cash balance to the budgeted cash balance. 0f the expected cash balance exceeds the budgeted cash balance1 then the company is dealing with an excess which it can consider in"esting. 0f the expected cash balance is smaller that the budgeted cash balance1 then the company will be dealing with a deficit and will ha"e to loojk for additional financing. *xample
Suppose you are preparing your personal cash budget for the year $22(. 3uring $22(1 assume that you can expect to earn 4(522 from your summer job and 41$22 from work as a tutor. Also1 your family always gi"es you gifts totaling around 4/22 during the year. A scholarship from a local 6iwanis Club adds 41222 each year while you are in college. Assume your family pays your college costs except for room and board. -lanned expenditures for the year $22( include apartment rent for the year at 4172 per month for 1$ months and annual food costs of 47522. Transportation costs usually run about 4/2 per month. 8ou need to ha"e a little fun1 so entertainment will cost 4122 per month. 8ou need to keep a little cash in reser"e for tra"el and other emergencies1 so you maintain a cash reser"e of 4722 at all times. To start $22(1 you ha"e the cash reser"e plus 4$22. 9ill you need a loan in $22(: To answer this 'uestion1 prepare your personal cash budget for the year based on the data gi"en.

Solution& Cash balance at the beginning of $22( Add& *xpected Cash +eceipts Summer <ob Tutoring =amily gifts Scholarship Total *xpected Cash +eceipts Total expected a"ailable cash 5>22 3educt& *xpected Cash -ayments Apartment +ent !4172 x 1$ months# =ood Transportation !4/2 x 1$ months# *ntertainment !4122 x 1$ months# Total *xpected cash payments *xpected Cash balance at year end Budgeted Cash +eser"e 3eficit for $22( 4;22 4(522 1$22 /22 1222 5$22

41?22 7522 /?2 1$22 >2?2 !4$1?2# 722 !4$5?2#

A loan is needed for the year. This is what would be in"ol"ed in a schedule of cash receipts& Tre"or Company was organi@ed on %arch 11 $22/. -rojected sales for each of the first three months of operations are as follows& %arch 4/?21222 April 7>21222 %ay 7271222 The company expects to sell 12A of its merchandise for cash. Bf sales on account 52A are expected to be collected in the month of sale1 (2A in the month following sale and the remainder in the second month following sale. -repare a schedule of cash collections for sales of %arch1 April1 and %ay. !Cash collectedC 47$71;22 for %ay# This is what would be in"ol"ed in calculating a schedule of cash payments& Tutor.com 0nc. was organi@es on %ay (11 $22/. -rojected selling and administrati"e expenses for each of the first three months of operations are as follows& <une 4>71/22 <uly 1$51?22 August 1751(22

3epreciation1 insurance and property taxes represent 41$1222 of the estimated montly expenses. The annual insurance premium1 was paid on %ay (11 and the property taxes =or the year will be paid in 3ecember. ThreeCfourths of the remainder of the expenses are expected to be paid in the month in which they are incurred with the balance to be paid the following month. -repare a schedule of cash payments for selling and administrati"e expenses for <une1 <uly and August. !Cash payments in August C41(51>$7# Dere is another longer problem that we can sol"e& The controller of Butler Boat Company instructs you to prepare a monthly cash budget for the next three months. 8ou are presented with the following budget information for August1 September1 and Bctober1 $22/. August September Bctober 47>21222 45721222 4;721222 (221222 (/21222 (>21222 1721222 1;21222 $221222 1$21222

Sales %anufacturing Costs Selling and Administrati"e *xpenses Capital *xpenditures

The company expects to sell about 12A of its merchandise for cash. Bf sales on account1 52A are expected to be collected in full in the month of sale1 and the remainder1 the following month. 3epreciation1 insurance and property tax expense represent 4(21222 of the estimated monthly manufacturing costs. The annual insurance premium is paid in <uly1 and the annual property taxes are paid in Eo"ember. Bf the remainder of the manufacturing costs1 ?2A are expected to be paid in the month in which they are incurred and the balance in the following month. Assets as of August 1 include Cash of 47712221 marketable securities of 4?71222 and accounts recei"able of 47>/1222 !4//$1222 from <uly sales and 417$1222 from <une sales#. Current liabilities as of August 1 include a 412212221 12A >2 day note payable Bctober $2 and 4521222 of accounts payable incurred in <uly for manufacturing costs. All selling and administrati"e expenses are paid in cash in the period in which they are incurred. 0t is expected that 41722 in di"idends will be recei"ed in August. An estimated income tax payment of 4/$1222 will be made in September. Butler s regular 'uarterly di"idend of 4171222 is expected to be declared in September and paid in Bctober. %anagement desires to maintain a minimum cash balance of 4/71222. !Bctober deficiency C 4/11222#