Accounting and Control

EMBA

Financial Budgets – Cash Budget

Lecture 9B
 Learning Objectives
• At the end of lecture 9B, students should be able
to:
• Explain the purpose and components of a
financial budget.
• Explain the benefits of a cash budget.
• Identify and explain the sections of a cash
budget.
• Prepare a cash budget
• Prepare proforma balance sheet

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Components of a Master Budget
Sales Budget

Production
Budget

DM Budget DL Budget MOH Budget

Expense Budget

Budgeted Income
Statement

Budget Balance
Capital Budget Cash Budget
Sheet
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 Financial Budgets

• Once a company completes the various pieces of the

operating budget and create the proforma
(budgeted) income statement, it will next develop
the necessary financial budgets to identify the
assets and capital needed to support the operations.
• These financial budgets include the capital
expenditure budget, the cash budget, the proforma
balance sheet and the proforma statement of cash
flows.

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 Cash Budget
• Maintaining adequate liquidity is a requirement for staying in business
and a cash budget is a plan to ensure liquidity.
• A cash budget is a statement of expected cash inflows and outflows over a
specified period. Often the cash budget is categorized into monthly
periods, which allows for greater monitoring and control of cash levels.

• The objective of the cash budget is to ensure that sufficient cash is

available at all times to meet the level of operations that are outlined in
the various budgets.

• Cash budgets are a useful tool and are often used by managers. The cash
budget allows a manager to:
a) Determine shortfalls in cash
b) Arrange financing before the shortfall occurs
c) In periods of surplus, plan short-term investment strategies.

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 Sections of the Cash Budget

The cash budget has four sections:

1)Cash receipts
2)Cash disbursements / payments
3)Excess or deficient
4)Financing

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 Sections of the Cash Budget
ANY COMPANY
Cash Budget
Beginning cash balance X,XXX
Add: Cash receipts X,XXX
Total available cash X,XXX
Less: Cash disbursements/payments (X,XXX)
Excess (deficiency) X,XXX
Financing X,XXX
Ending cash balance X,XXX

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 Cash Budget
Cash Receipts
This section represents cash inflows, mostly from sales. Inflows can be cash or accounts receivables resulting
from customers buying on account (credit sales).

Cash Payments
This section includes all cash outflows, except those associated with financing. Example of cash payments
include direct materials, wages and salaries, overhead, capital purchases, dividend payments and income
taxes.

Surplus or Deficiency Section

This represents the total cash plus receipts less cash payments plus any minimum cash balance required.
Total cash
plus: receipts
less: payments
= Excess or (deficiency)

Financing Section
This section includes cash inflow from borrowing, cash outflow from loan repayments and interest on these
loans

Other Information
The cash budget begins with a beginning cash balance. The ending cash balance in one period becomes the
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beginning cash balance in the next period.
 Cash Budget Structure
Months
Jan Feb March April
Beginning cash balance xx xx xx xx
Add receipts
Collections from customers (A/R) xx xx xx xx
Total cash available for needs xx xx xx xx A
Less cash payments/disbursements
Payments for purchases (A/P)xx xx xx xx
Wages xx xx xx xx
Income taxes xx xx xx xx
Total cash payments xx xx xx xx B
A – B Excess (deficiency) xx xx xx xx

Financing required
Borrowings/investment xx xx xx xx
Interest payments xx xx xx xx
Ending cash balance xx xx xx xx

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 Benefit of a Cash Budget
• Contributes to more effective cash
management
– it shows managers when additional financing is
necessary well before the actual need arises.
– it indicates when excess cash is available for
investments or other purposes.

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 Practice Question
ABC Company management wants to maintain a
minimum monthly cash balance of ¢15,000. At
the beginning of March, the cash balance is
¢16,500, expected cash receipts for March are
¢210,000, and cash disbursements are expected
to be¢220,000.
• How much cash, if any, must be borrowed to
maintain the desired minimum monthly
balance?
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 Example of Cash Budget section
The ABC company has budgeted sales for the second quarter of 2010 with
• GHC400,000 for April,
• GHC525,000 for May and
• GHC600,000 for June.
Normally
• 20% are cash sales and
• 80% of the sales are on account.
As well
• 30% of sales on account are normally collected during the
month of sale,
• 50% the following month following the month of sale and
• 20% in the second month following the month of sale.

Calculate the total cash receipts for the quarter.

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 Multiple Choice Question 2
Joe’s Company makes collections on sales according to the following schedule:
30% in the month of sale
60% in the month following the month of sale
8% in the second month following the month of sale
2% is uncollectible

The following sales are expected:

January ¢100,000
February 120,000
March 110,000

What should be the budgeted cash collections in March?

a) ¢105,000
b) ¢110,000
c) ¢110,800
d) ¢113,000

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 Multiple Choice Question 1
ABC Company has a cash balance of ¢9,000 on April 1. The company must
maintain a minimum cash balance of ¢6,000. During April,
• expected cash receipts are ¢45,000.
• expected cash payments total ¢52,000.

What amount will the company need to borrow during April?

a) ¢2,000
b) ¢4,000
c) ¢6,000
d) ¢8,000

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 Practice Question
• ABC Company management wants to maintain
a minimum monthly cash balance of ¢11,000.
At the beginning of April, the cash balance is
¢22,000, expected cash receipts for March are
¢245,000, and cash disbursements are
expected to be ¢356,000. How much cash, if
any, must be borrowed to maintain the
desired minimum monthly balance?

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 Question
XYZ Company has prepared the following sales projections for its second and
third quarters:
MayGHC 100,000August 160,000
June 120,000 September 150,000
July 140,000 October 130,000

Cash collection experience has been the following:

• 50 percent of sales are collected during the month of sale
• 45 percent of sales are collected in the month following sale
• The remaining 5 percent of sales in never collected.

XYZ Company’s total budgeted cash collections for the period August to
October are:
a) GHC427,500
b) GHC414,500
c) GHC440,000
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d) GHC422,500
 Practice Question

You are given the following information for the ABC Company:
 
Monthly sales
November 2011 (actual)GHC100,000
December 2011 (actual) 150,000
January 2012 (estimated)175,000
February 2012 160,000
March 2012120,000
April 2012 100,000
Experience has shown that Cash collection pattern is as follows:

–30% in the month of sale

–50% in the following month
–18% in the second month following
–2% uncollected (bad debt)
Required:
 Prepare the cash collections schedule for the first quarter of 2012
What are the bad debts for April?
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 Practice Question

XYZ Company makes a product that is very popular as a Mother’s Day gift. Peak sales
occur in May of each year. The following sales amounts are budgeted for the second
quarter of the year (all sales are on credit).
Month April MayJune
Budgeted sales ¢300,000 ¢500,000 ¢200,000

From past experience, the company knows that:

• 20% of a month’s sales are collected in the month of sale with a 2% discount
• 70% are collected in the month following month of sale
• 10% are collected in the second month following month of sale

February and March sales totaled ¢230,000 and ¢260,000 respectively

Required:
Prepare a schedule of cash collections from sales, by month and in total for the second
quarter.
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 Practice Question
ABC Corporation has the following sales budget for the first four months of the current year:

Month Sales
January ¢400,000
February 320,000
March 440,000
April 360,000

Historically, the following trend has been established regarding cash collection of sales:

65 percent in month of sale

25 percent in month following sale
8 percent in second month following sale
2 percent uncollectible

The company allows a 2 percent cash discount for payments made by customers during the
month of the sale. November and December sales were ¢400,000 and ¢240,000, respectively.
All sales are on account.

Required: Prepare a schedule of budgeted cash collections from sales for January, February, and
March.
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 Cash Budget Question
Splash company, a distributor of fashion items, normally collects its
receivables 50% in month of sale, 30% the subsequent month and 18% in the
third month. Historically, 2% is not collected (bad debt). Splash attempts to
match its payments of payables closely to its receivables and pays for its
purchases 40% in the month of purchase, 25% in the next month and 35% in
the third month. Sales during February, March and April were GHC150,000,
GHC193,000 and GHC162,000 respectively. Purchases during these three
months were GHC196,000, GHC178,000 and GHC225,000 for February, March
and April. The company pays income tax installments of GHC4,000 each
month. Assuming the beginning balance of cash as at February 1 is
GHC39,000 and the company wishes to maintain a cash balance of
GHC30,000. Prepare a cash budget for February, March and April. December
and January sales were GHC240,000 and GHC182,000 respectively.
December and January purchases were GHC210,000 and GHC180,000
respectively.

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 Proforma Balance Sheet
• A proforma balance sheet (also known as budgeted
balance sheet or financial position) shows how operations
should affect the company’s assets, liabilities and
shareholders’ equity.
• The proforma balance sheet is usually the last item
prepared in a master budget and it is based partly on the
balance sheet at the end of the current period.
• The effects of operations are added to the data in the
prior balance sheet.
• Similar to the preparation of the proforma income
statement, the percentage of sales method will be used in
preparing the proforma balance sheet.
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 Example of Proforma Balance Sheet
• ABC Company uses the percentage of sales method to prepare its proforma
financial statements. Based on the company’s past financial statements, the
following relationships can be established between several items and sales:
– Cash is 3% of sales
– Accounts receivable is 18% of sales
– Inventories are 25% of sales
– Accounts payable is 12% of sales
– Net fixed assets (non-current assets) is 35% of sales
– Accrued liabilities are 8% of sales
• ABC’s 2015 sales revenue is ¢100,000 and it is projecting a sales revenue growth
of 18% next year.
• The company currently has 10,000 common shares outstanding and the selling
price is ¢2 per share
• The company has a short-term loan of ¢5,000 and a long-term debt of ¢20,000
• Retained earnings for the current year is ¢16,000 and a current year net income
of ¢5,967.
• Assume no interest expense or income tax expense.

• Prepare a proforma balance sheet for the upcoming year 2016 22