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 entitys cash balance at the beginning of the period. (this is the
closing cash balance from the previous period and represents how much was left
over from the previous period)

2. Add budgeted cash receipts and subtract budgeted cash payments. (Managers
have to predict the cash effect of all transactions of the budget period including:
a) revenue and expense transactions
b) asset acquisition and sale transactions
c) liability and owner equity transactions

3. Beginning Cash Balance + Expected Receipts Expected Payments = Expected

Cash Balance at the end of the period.

4. Compare the expected cash balance to the budgeted cash balance. If the expected
cash balance exceeds the budgeted cash balance, then the company is dealing with
an excess which it can consider investing.

If the expected cash balance is smaller that the budgeted cash balance, then the
company will be dealing with a deficit and will have to loojk for additional
financing.

Example
Suppose you are preparing your personal cash budget for the year 2003. During 2003, assume that you can
expect to earn $3600 from your summer job and $1200 from work as a tutor. Also, your family always
gives you gifts totaling around $400 during the year. A scholarship from a local Kiwanis Club adds $1000
each year while you are in college.
Assume your family pays your college costs except for room and board. Planned expenditures for
the year 2003 include apartment rent for the year at $150 per month for 12 months and annual food costs of
$5600. Transportation costs usually run about $40 per month. You need to have a little fun, so
entertainment will cost $100 per month.
You need to keep a little cash in reserve for travel and other emergencies, so you maintain a cash
reserve of $500 at all times. To start 2003, you have the cash reserve plus $200.
Will you need a loan in 2003? To answer this question, prepare your personal cash budget for the
year based on the data given.
Solution:

Cash balance at the beginning of 2003 $700

Add: Expected Cash Receipts
Summer Job $3600
Tutoring 1200
Family gifts 400
Scholarship 1000
Total Expected Cash Receipts 6200
Total expected available cash 6900

Deduct: Expected Cash Payments

Apartment Rent ($150 x 12 months) $1800
Food 5600
Transportation ($40 x 12 months) 480
Entertainment ($100 x 12 months) 1200
Total Expected cash payments 9080
Expected Cash balance at year end ($2180)

Budgeted Cash Reserve 500

Deficit for 2003 ($2680)

A loan is needed for the year.

This is what would be involved in a schedule of cash receipts:

Trevor Company was organized on March 1, 2004. Projected sales for each of the first
three months of operations are as follows:

March $480,000
April 590,000
May 505,000
The company expects to sell 10% of its merchandise for cash. Of sales on account 60%
are expected to be collected in the month of sale, 30% in the month following sale and
the remainder in the second month following sale.

Prepare a schedule of cash collections for sales of March, April, and May. (Cash
collected- $525,700 for May)

This is what would be involved in calculating a schedule of cash payments:

Tutor.com Inc. was organizes on May 31, 2004. Projected selling and administrative
expenses for each of the first three months of operations are as follows:
June $95,400
July 126,800
August 156,300
Depreciation, insurance and property taxes represent $12,000 of the estimated montly
expenses. The annual insurance premium, was paid on May 31, and the property taxes
For the year will be paid in December. Three-fourths 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.

Prepare a schedule of cash payments for selling and administrative expenses for June,
July and August. (Cash payments in August -$136,925)

Here is another longer problem that we can solve:

The controller of Butler Boat Company instructs you to prepare a monthly cash budget
for the next three months. You are presented with the following budget information for
August, September, and October, 2004.

August September October

Sales $590,000 $650,000 $750,000
Manufacturing Costs 300,000 340,000 390,000
Selling and Administrative Expenses 150,000 170,000 200,000
Capital Expenditures 120,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account,
60% are expected to be collected in full in the month of sale, and the remainder, the
following month. Depreciation, insurance and property tax expense represent $30,000 of
the estimated monthly manufacturing costs. The annual insurance premium is paid in
July, and the annual property taxes are paid in November. Of the remainder of the
manufacturing costs, 80% 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 $55,000, marketable securities of $85,000 and
accounts receivable of $594,000 ($442,000 from July sales and $152,000 from June
sales).

Current liabilities as of August 1 include a $100,000, 10% 90 day note payable October
20 and $60,000 of accounts payable incurred in July for manufacturing costs. All selling
and administrative expenses are paid in cash in the period in which they are incurred. It
is expected that $1500 in dividends will be received in August. An estimated income tax
payment of $42,000 will be made in September. Butlers regular quarterly dividend of
$15,000 is expected to be declared in September and paid in October. Management
desires to maintain a minimum cash balance of $45,000.

(October deficiency - $41,000)