CASH BUDGET

Prof. Dr. Bengü VURAN

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 What is a Cash Budget?

A cash budget is a forecast of estimated cash

receipts, estimated cash payments and the
resultant cash position for a certain period of
time.

It is prepared for a shorter time frame than

other statements.
(i.e., month-by-month or even week- by
week).

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 Income Statement
 Balance Sheet Past events
 Statement of Cash Flow

Future
 Cash Budgets events

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 Why is Cash Budget Important?

A cash budget
• Allows companies to predict possible cash
shortages and take corrective action
before a crisis occurs.
• Allows companies to see if large sums of
excess cash are lying idle—could be put
to better use.

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 Cash Budget reveals periods when shortages of
funds may occur

◼ These periods can be identified ahead of time

◼ Precautions can be taken to avoid these shortages
◼ Arrangements can be made with banks to meet
shortfalls

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 Cash Budget reveals periods of excess funds
◼ Business should avoid idle funds left in bank
accounts
◼ Identifying such periods allows finance manager to
apply an appropriate investment strategy by
scheduling of investments into short-term money
markets, deposits, government securities etc.

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 Adjustments for seasonal fluctuations can
be made through cash budgets.
◼ Some businesses experience high/low sales in
certain parts of the year.For exp:
 Tourism

 Farming

 Department stores

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 Preparation of Cash Budget

Receipts and Payments Method: Under this method,

all expected cash receipts and payments during the
budget period should be considered.
 Items of Cash Budgets
Activities Cash Receipts From Cash Payments For
Operating Cash Sales Purchases of Direct Materials
Collection of Credit Sales Purchases of operating Supplies
Direct Labor
Manufacturing Overhead Expenses
Selling Expenses
Administrative Expenses

Investing Sale of investments Purchases of investments

Sale of fixed assets Purchases of fixed assets

Interest Income from investments

Cash dividends from investments

Financing Loan proceeds Loan repayment

Proceeds from sale of stock Interest Expense

Proceeds from sale of bond Cash dividends to stockholders

 Do not include:

• Depreciation
Expense

• Any other
non-cash
income or
expense
 GENERAL FORMAT OF CASH BUDGET

Jan Feb ………… Nov Dec

Cash Receipts $ XXX $XXG $XXM $XXT

Less: Cash Disbursements XXA XXH XXN XXU

Net Cash Flow $ XXB $ XXI $XXO $XXV

Add: Beginning Cash XXC XXD $XXJ XXP XXQ

Ending Cash $ XXD $XXJ $XXQ $XXW

Les: Minimum Cash Balance XXE XXK XXR XXY

Cash Surplus ( Shortage ) $ XXF $XXL $XXS $XXZ

 CASH BUDGET EXAMPLE
Halley Company, a defense contractor, is developing a cash
budget for June, July and August.

Halley’s sales in April and May were $ 100,000 and $

200,000 respectively.
Sales of $ 400,000 , $ 300,000 and $ 200,000 are forecasted
for June, July and August.
 CASH BUDGET EXAMPLE-cont’d.
Historically, 20 % of the sales have been for cash, 50 %
have been generated accounts receivables collected
after one month, and the remaining 30 % have
generated accounts receivable collected after two
months.

In June, the company will sell an equipment costing $

40,000. The proceeds will be received in the same
month.
 CASH BUDGET EXAMPLE-cont’d.
The firm’s purchases represent 70 % of the month’s
sales and 20 % of this amount is paid in cash, 80 % is
paid in the month following the purchase.
CASH BUDGET EXAMPLE- cont’d.

• In June, the company will sell an equipment costing $

40,000. The proceeds will be received in the same
month.
• A cash dividend of $ 20,000 will be paid in June.
• Rent of $ 5,000 will be paid each month.
• Wages and salaries totals $ 8,000 and are due in each
month.
• Taxes of $ 25,000 must be paid in August.
• New machinery costing $ 130,000 will be purchased and
paid in July.
• An interest payment of $ 10,000 is due in August.
 CASH BUDGET EXAMPLE-cont’d.
Halley’s end of May cash balance was $ 50,000.
The firm wishes to maintain a minimum cash balance
of $ 25,000.

Prepare cash budget for Halley Company for the

months June, July and August.