Cash Budget: The principal aim of the cash budget, as a tool of planning, is to ascertain whether, at any time, there

is likely to be an excess or shortage of cash. The preparation of cash budget involves various steps. The first element of a cash budget is the selection of the period of time to be covered by the budget. Alternatively, it is referred to as the “planning horizon”. The planning horizon means the time span and the sub-periods within that time of span over which the cash flows are to be projected. There is no fast and hard rule. The period coverage of a cash budget will differ from firm to firm depending upon its nature and the degree of accuracy with which the estimates can be made. As a general rule the period selected should be neither too long nor too short. If it is too long, it is likely that the estimates will be upset as we cannot visualise them at the time of the preparationof the Budget. If on the other hand, the time span is too small, the disadvantage are: i Failure to take into account important events which lie just beyond the period covered by the budget; ii Heavey workedload in preparation; iii Abnormal factors that may be operative. The planning horizon of a cash budget should be determined in the light of the circumstances And requirements of a particular case. For instance if the flows are expencted to be stable and dependable, such a firm may prepare a cash budget covering a long period, say, a year and uncertain, a quarterly budget divided into monthly intervals may be sub-divided into weekly or even daily budgets may be necessary. If the flows are subject to extreme fluctuations, a daily budget may be called for. The idea behind sub-dividing the budget period into smaller intervals is to highlight the movement of cash from one sub-period to another. The sub-division will provide information on the fluctuations in the cash reservoir level during the time span covered by the budget. The second element of the cash budget is the selection of factors that have a bearing on cash flows. The items included in the cash budget are the cash items only, non-cash items such as depreciation are excluded. The factors that generates cash flow are generally divided, for purpose of constrcting a cash budget, into two broad ctegories: (a) Operating and (b) Financial This two-fold classification of cash budget items is based on their “nature”. While the former category includes cash flows generated by the operations of the firms and are known as “operating cash flows”, the letter consist of “financial cash flows”. The major components of the two types of cash flows are outlined below. The most important budget which is prepared under this functional area is the cash budget. It is an estimate of the expected cash receipts and cash payments during the budget period. Thus by preparing the cash budget, it is possible to predict whether at any point of time, there is likely to be excess or shortage of cash. If the shortage of cash is estimated, it may be required to arrange the cash is estimated, it may be required to arrange the cash from some other source. If the excess of cash is estimated, it may be possible to explore the investment opportunities. Before preparing the cash budget, following principles should be kept in mind. i) The period for which cash budget is prepared should be selected very carefully. There is no fixed rule as to the period to be covered by the cash budget. It may very from company to company depending upon the individual requirements. As a general rule, the period covered by the cash budget should niether be too long or too short. If it is too long, it is possible that the estimate will not be accurate. If it is too short, the factors which are beyond the control of management will not be given due consideration.

1. Non-operating Cash Flows: These are items of cash flows which arise as a result of regular operations of the business. the estimated cash payment being deducted from this sum to arrive at the closing cash balance. A cash budget may be prepared in any of the following three methods. Naturally. Receipts and Payments method: This method is useful for short temi estimations. Eg. . The standard items which may appear on the cash budget prepared by this method may be stated as below: Operating : Cash sales Collection form debtors Interest / Dividend received Non-operating Issue of shares / debentures Receipts of loans and borrowings Sales of fixed Assets Sales of Investments Cash Outflow ii) Operating : Payment to creditors Cah purchase of raw materials wages / salaries Various of kinds of overheads (To the extent they are actully paid) Non-operating Redumption of shares / debentures Loan installments Purchase of fixed assets Interest Taxes Dividends. all those items which do not involve cash flow will not be considered while preparing the cash budget.ii) The items which should appear in the cash budget. It lists the various estimated sources of cash receipts on one hand and the carious estimated applications of cash on the other. the various items appearing on the same may be classified under the following two categories: i) Operating Cash Flows: These are items of cash flows which arise as a result of regular operations of the business. While preparing the cash budget by this method. to which various estimated cash receipts are added. though the amount of depreciation affects the determination of tax liability which involves cash outflow. Thus finally cash budget appears in the form of opening cash balance. should be carefully decided. it does not affect the cash budget. As the cost of depreciation does not involve any cash outflow.

After bothe the sides of Balance sheet are balanced. Current Liabilities . the balancing figure indicates the estimated cash balance in the hand at the end of that period. Further. . provision and other non – cash expenses Add : Decrease in Current assets or Increase in Current Liabilities Add : Capital Receipts Add : Receipts of Loans / Borrowings Less : Capital Expenditure Less : Repayment of Loan Installmets Less : Payment of dividends / taxes In the other words. Opening Cash Balance Add : Profit before depreciation. it indicates the cash requirement only at the end of budger period. Current Assets . cash budget prepared as per this method is in the form of cash flow statement. Adjusted Profits/ Losses Method : This method also is useful for long term estimates. 3. According to this method. Balance Sheet Method: This method is usefull for long term estimates. According to this method. But Except Cash.2. Long Term Liabilities . the cash budget is prepared in the following way to show the estimated cash balance at the end of the budget period. Fixed Assets . after considering the various terms viz. any excess or shortage of cash during the budget period are not considered. the budgeted Balance Sheet is prepared for the following budget period. Capital . This method does not consider the expenses and assumes the reular pattern of inflow and outflow of cash.

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