Chapter 8

Exercise 8.1
a Newtown Plumbing: Cash budget for month ending 31 August 2015
Estimated receipts $ $
Cash fees 6000
Receipts from debtors 1000
GST received 600 7600

less Estimated payments

Wages 400
Advertisin
g 600
Office expenses 1200
Rent 2000
Payments to creditors 3600
GST paid 380 8180

Excess of receipts over payments (580)

Bank balance as at 1-Aug-15 850
Estimated bank balance as at 31-Aug-15 270

b Comment on firm’s cash position:

Although the business has $850 at the start of August, the cash budget shows that the
cash is expected to almost run out by the end of the month. The budget in this case acts
as a warning to the owner that a liquidity problem may be looming in the near future.
c Two practical steps to improve the situation:
1 Inject additional cash into the business (capital).
2 If possible, delay the cash payments to creditors.
3 Postpone the payment of expenses (perhaps advertising).
4 Offer discounts to debtors for prompt payment.

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Exercise 8.2
a Mathews Carpentry Services: Cash budget for quarter ending 31 December 2015

October November December

Estimated receipts $ $ $
Cash fees 9000 9500 10000
GST collected 900 950 1000
Total receipts 9900 10450 11000
     
less Estimated payments      
Wages 3000 3200 3200
Advertising 300 400 500
Purchases of timber 2000 2200 2400
Vehicle expenses 300 300 300
Drawings 2200 2200 2200
GST paid 260 290 320
8060 8590 8920
Excess of receipts over payments 1840 1860 2080
Bank balance as at start of month 3200 5040 6900
Estimated bank balance as at end of month 5040 6900 8980

b In which month should she purchase the new equipment?

The cash budget predicts a bank balance of $6900 cash at the end of November.
Therefore, if the equipment was purchased during November, the business would be left
with an overdraft of about $100. It may be wise to wait until December, when the additional
revenue is expected to allow the business to build up a safety margin of cash. This should
then allow the firm to purchase the equipment with less risk of running out of cash.
c Does a cash budget satisfy reliability?
Because cash budgets are based on predictions of future events, they cannot satisfy the
demands of reliability. A cash budget cannot be verified by source documents as a
historical report can be. However, the demands of relevance overrule the demands of
reliability in this case. Budgets are highly relevant reports for management and, although
they cannot satisfy the demands of reliability, they are still relied on to assist the future
planning of the business.

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Exercise 8.3
a Malvern Tailors: Cash budget for quarter ending 30 September 2015
July August September
Estimated receipts $ $ $
Cash fees 6500 6500 7000
GST received 650 650 700
Total receipts 7150 7150 7700
     
less Estimated payments      
Wages 1200 1500 1500
Cleaning 320 320 320
Office expenses 100 100 100
Payments to suppliers 3250 3250 3500
Insurance 1350
Loan repayments 1600
Drawings 1600 1600 1600
GST payments 367 502 392
8437 8622 7412
Excess of receipts over payments (1287) (1472) 288
Bank balance as at start of month 1600 313 (1159)
Estimated bank balance as at end of
month 313 (1159) (871)

b Report on liquidity situation:

The cash budget reveals that the business is expected to run short of cash in the next
three months. Estimated payments are expected to exceed receipts in both July and
August. During September, the firm is expecting a small excess of receipts. To avoid the
cash shortage anticipated, Joseph should consider reducing the amount of monthly
drawings. Other action to consider would be to postpone the payment of expenses or to
attempt to increase revenue. A review of charges to customers may lead to an increase in
anticipated receipts.
c GST position as at 30 September:
As a total of $2000 in GST is expected to be collected and $1261 is expected to be paid by
the business, a GST liability of $739 is expected to exist at the end of September. This has
serious implications for the business owner, as he must ensure that this amount of cash
will be available when it is due for payment to the Taxation Office. As the budget predicts
an overdrawn bank balance for the end of September, the owner will have to plan carefully
to ensure that he can meet his GST liability.

Exercise 8.4
a Scoresby Landscaping: Breakdown of fees revenue into cash and credit fees
Cash fees
Month Total fees Credit fees
25% 75%
  $ $ $
July 20000 5000 15000
August 22000 5500 16500
September 22000 5500 16500
October 24000 6000 18000
November 26000 6500 19500
b Scoresby Landscaping: Schedule of collections from debtors

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 Credit Collections
Month fees in:    
September October November
    $ $ $
July 15000 6000    
August 16500 9900 6600  
September 16500   9900 6600
October 18000     10800
November 19500      
Total estimated receipts   15900 16500 17400

c Scoresby Landscaping: Cash budget (extract) for quarter ending 30 November 2015
September October November
Estimated receipts  $  $  $
Cash fees 5000 5455 5909
Collections from debtors 15900 16500 17400
GST receipts 500 545 591
Total receipts 21400 22500 23900

Exercise 8.5
a E.Z. Painting Services: Breakdown of fees revenue into cash and credit fees
Month Total fees Cash fees Credit fees
70% 30%
   $ $ $
January 40000 28000 12000
February 37000 25900 11100
March 35000 24500 10500
April 35000 24500 10500
May 30000 21000 9000
June 25000 17500 7500

b E.Z. Painting Services: Schedule of collections from debtors

Collection
Month Credit fees s in:    
April May June
    $ $ $
January 12000 1200    
February 11100 3330 1110  
March 10500 6300 3150 1050
April 10500   6300 3150
May 9000   5400
June 7500      
Total estimated receipts   10830 10560 9600

c Calculation of GST collections  

Total GST
received receipts Cash fees
Month $ $ $  
April 24500 2227 22273  
May 21000 1909 19091  
June 17500 1591 15909  

d E.Z. Painting Services: Schedule of payments to creditors

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 Payments
Month Credit in:    
Purchases April May June
  $ $ $ $
March 20000 19000    
April 18000   17100  
May 16000     15200
June 14000      
Total estimated
payments   19000 17100 15200

Exercise 8.6
a Green Thumb Gardening: Schedule of collections from debtors
Cash rec.
Credit fees  August
Month $ $

June 18000 3600

July 20000 16000
Total est. collections   19600

Green Thumb Gardening: Cash budget for month ending 31 August 2015
Estimated receipts $ $
Cash fees 18000
Collections from debtors 19600
GST collected 1800 39400
 
less Estimated payments
Cash purchases 1000
Payments to creditors 9900
Advertising 1000
Wages 4000
Drawings 1000
Loan repayments 800
Rates payment 1200
Deposit on truck 2000
GST paid 200 21100

Excess of receipts over payments 18300

Bank balance as at 1-Aug-15 2300
Estimated bank balance as at 31-Aug-15 20600

b Comment on cash position:

The business appears to have an ample cash balance. However, keeping in mind that
Joseph has made a commitment to pay for the truck (another $18000) in September, this
will have a huge impact on his cash balance. It is vital that Joseph prepares budgets for
September and October to get a clearer picture of the liquidity position of his business.
c Recommended type of finance:
1 A short to medium-term loan (over 3–5 years): the business appears to have a
satisfactory cash flow to handle a short- to medium-term loan.

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 2 Leasing: this form of finance avoids a large cash outlay and provides Joseph with a
new, reliable vehicle.

Exercise 8.7
a Abbey’s Electricals: Budget variance report for month ended 30 November 2015
Variance
Budget Actual % F or
$ $ $ $ U
Receipts          
Cash fees 12000 13000 1000 8.33% F
Collections from debtors 6000 2400 3600 60.00% U
GST receipts 1200 1300 100 8.33% F
Total receipts 19200 16700 2500 13.02% U
Payments    
Wages 5500 2600 2900 52.73% F
Advertising 800 400 400 50.00% F
Rent 2400 2400 0 0.00%
Payments to suppliers 6600 6800 200 3.03% U
Office expenses 400 420 20 5.00% U
Loan repayments 600 700 100 16.67% U
Purchase of computer 0 3000 3000 100.00% U
Drawings 1200 1800 600 50.00% U
GST payments 1020 1302 282 27.65% U
Total payments 18520 19422 902 4.87% U
     
Excess of receipts over payments 680 (2722)  
Bank balance as at 1-Nov-15 1500 1500    
Bank balance as at 30-Nov-15 2180 (1222)

b Report on budget:
Significant positive (favourable) variances include:
1 Cash fees were $1000 (8.3%) above budget.
2 Wages were $2900 (53%) below budget. Perhaps casual workers were not used as
expected.
3 Advertising was $400 (50%) below budget. Possibly cut back as a reaction to a
shortage of cash during the month.
Significant negative (unfavourable) variances include:
1 Collections from debtors were $3600 (60%) below budget. This indicates poor
collection of accounts. Remedial action definitely required!
2 Loan repayments were $100 (16.7%) above budget. This may have been due to
external factors such as a change in interest rates. Thus it may not be controllable by
the business.
3 The purchase of a computer was not in the budget at all. This is an example of
unplanned spending. Why was it purchased this month?
4 Drawings were $600 (50%) above budget. Cash may have been required for personal
use, but this has had a serious impact on the cash available for business use.
c Comment on approach to budgeting:
Abbey appears to have followed the ‘set and forget’ approach to budgeting. The spending
in November bears little resemblance to the budget plan and therefore the budget is of
little use. There are too many significant variances for this budget to be seen as

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successful. The purchase of the computer for $3000 cash when the predicted bank
balance was only $2150 is evidence that the budget plan has been ignored.

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Exercise 8.8
a Donaldson’s Dry Cleaning
Budget variance report for quarter ended 30 September 2015
Variance    
Budget Actual %
$ $ $ $ F or U
Receipts          
Cash fees 24000 32000 8000 33.33% F
Collections from debtors 12000 14500 2500 20.83% F
Loan from ABC Finance Co. 5000 0 5000 100.00% U
GST receipts 2400 3200 800 33.33% F
Total
receipts 43400 49700 6300 14.52% F
Payments      
Wages 6000 6500 500 8.33% U
Insurance 800 840 40 5.00% U
Suppliers 14000 16400 2400 17.14% U
Postage and telephone 400 380 20 5.00% F
Purchase of new equipment 5000 4600 400 8.00% F
Cleaning of shop 1200 1200 0 0.00%
Drawings 4500 3800 700 15.56% F
GST payments 2140 2342 202 9.44% U
Total
payments 34040 36062 2022 5.94% U
     
Excess of receipts over payments 9360 13638  
Bank balance as at 1-Jul-15 500 500  
Bank balance as at 30-Sep-15 9860 14138

b Predicted cash balance was: $9860

c Actual cash balance was : $14138
d Major reasons for difference:
Receipts: Cash sales were $8000 above budget. Collections from debtors were $2500
higher than expected. These unexpected results probably made the loan of $5000
unnecessary. (Note: although the loan is listed as an unfavourable variance, it would
probably be viewed as a positive result!)
Payments: Outflows to suppliers were $2400 over budget. This may have been due to the
higher levels of fees (more business leads to higher purchases of materials). Drawings
were 16% below budget. The equipment was purchased at a much better price than was
expected and helped the firm achieve the pleasing result.
e Quarterly budget period appropriate?
A monthly budget period is usually preferred to a quarterly budget. The problem with a
quarterly period is that shortages may occur in some months before a recovery occurs
within the quarter. A quarterly budget does not reveal the full month-by-month picture and
may therefore not show that liquidity problems may be forthcoming.

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Exercise 8.9
a Modern Renovations: Cash budget for month ending 31 October 2015
Estimated receipts $ $
Cash fees 16000
Loan NAB 10000
GST receipts 1600 27600

less Estimated payments

Purchases of materials 2300
Rent 9000
Wages 2000
Drawings 2000
GST payments 1130 16430
Excess of receipts over payments 11170
Bank balance as at 1-Oct-15 2700
Estimated bank balance as at 31-Oct-
15 13870

b Modern Renovations: Budgeted income statement for month ending 31 October 2015
Revenue $ $
Cash fees 16000
less Expenses
Materials 2300
Rent 3000
Wages 2000
Advertising 1400 8700
Net profit 7300

c Items included in the cash budget but excluded from the income statement:
Loan—NAB
GST receipts
Drawings
GST payments

d Explanation:
Cash budgets include all anticipated cash inflows and cash outflows. Income statements
only include revenue and expense items. Therefore, GST transactions and other cash
flows that involve assets, liabilities and owner's equity and not revenues and expenses will
not be reported in a budgeted income statement.

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Exercise 8.10
a Bayside Catering: Cash budget for month ending 30 September 2015
Estimated receipts $ $
Collections from debtors 3000
Cash fees 7800
GST receipts 780 11580

less Estimated payments

Payments to creditors 2900
Cash purchases—food 5400
Wages 2500
Petrol 280
Advertising 400
Insurance 600
Stationery 600
Loan repayments 5000
Drawings 1200
GST settlement 1000
GST payments 188 20068

Excess of receipts over payments (8488)

Bank balance as at 1-Sep-15 (1100)
Estimated bank balance as at 30-Sep-15 (9588)

b Comment on liquidity:
The business will enter September in overdraft and the situation is expected to deteriorate
further during the month. The decision to pay cash for purchases is not wise, as it puts
further pressure on a weak cash position. Michaels should be trying to delay payments,
rather than paying up front. The other problem is the large payment to Fewster Credit. This
business is not in a position to make large repayments at this stage. It may be wise to look
at refinancing the loan to avoid such repayments. Smaller, more regular payments are
preferred to give the firm time to get some cash together. A reworked budget, taking into
account these changes, will reveal that the liquidity of this business is not as bad as it
looks, if it can be better managed.

c Bayside Catering
Budgeted income statement for month ending 30 September 2015
Revenue $ $
Credit fees 2500
Cash fees 7800 10300
less Expenses
Food costs 5400
Wages 2500
Petrol 280
Advertising 400
Stationery expenses 100 8680
Net profit 1620

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d Comment on the expected profit result:
Despite the predictions of a worrying cash position, the business is expecting to earn a
small profit of about $1600 for the month of September. Depending on the owner's
personal needs, such a small profit may not be sufficient. It is also difficult to make other
comments without additional information such as the usual level of profit for a month or
previous period's results.
e Explanation:
The cash budget is based on cash inflows and cash outflows. On the other hand, the
budgeted income statement is based on revenues earned and expenses incurred. This
fundamental difference helps explain the different results. For example, cash outflows
includes the loan repayments of $5000. As this is not an expense, it is not reported in the
income statement.

Exercise 8.11
a Wizard Window Cleaners: Cash budget for month ending 30 April 2015
Estimated receipts $ $
Cash fees 7500
Collections from debtors 4400
GST receipts 750 12650
les
s Estimated payments
Payments to creditors 1500
Purchase of equipment 2000
Advertising 700
Interest on loan 100
Loan repayments 1000
Wages 2450
Petrol 230
Drawings 1600
GST settlement 1500
GST payments 293 11373
Excess of receipts over payments 1277
Bank balance as at 1-Apr-15 3500
Estimated bank balance as at 30-Apr-15 4777

b Wizard Window Cleaners

Budgeted income statement for month ending 30 April 2015  
Revenue $ $
Cash fees 7500
Credit fees 2500 10000
les
s Expenses
Materials 3070
Advertising 500
Interest on loan 100
Wages 2450
Petrol 230 6350
Net profit 3650
c Comment on the budget predictions
Both budgeted statements appear to be positive results for this business. The cash
balance is expected to increase by about $1200 and the projected profit for the month is

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 $3650. Depending on previous period results, the owner is likely to be pleased with both
the expected improvement in the cash position and the estimates of profit performance.

Exercise 8.12
a Con the Concreter
Budget variance report for income statement for month ended 30 June 2015
Variance
   
Budge
t Actual F or
$ $ $ % U
Revenue          
Concreting fees 12000 11000 1000 8.33% U

12000 11000 1000 8.33% U

Expenses    
Materials used 3200 3500 300 9.38% U
Petrol 350 400 50 14.29% U
Advertising 300 400 100 33.33% U
Insurance 50 50 0 0.00%
Wages 600 800 200 33.33% U
4500 5150 650 14.44% U
     
Net profit 7500 5850  

b Predicted net profit for June: $7500

c Actual net profit for June: $5850
d Why wasn't the profit achieved?
Major factors include:
1 sales being $1000 less than predicted
2 all expenses (except Insurance) being more than the budget predictions

Exercise 8.13
a Commercial Cleaners
Budgeted income statement for month ending 31 July 2015
Revenue $ $
Cleaning fees 12000
less Expenses
Wages 5000
Cleaning materials 1000
Office expenses 600
Insurance 100 6700
Net profit 5300

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 b Commercial Cleaners
Budget variance report for income statement for month ended 30 July
2015
Variance    
Budget Actual F or
$ $ $ % U
Revenue          
Cleaning fees 12000 14000 2000 16.67% F

12000 14000 2000 16.67% F

Expenses    
Wages 5000 6000 1000 20.00% U
Cleaning materials 1000 1000 0 0.00%
Office expenses 600 500 100 16.67% F
Insurance 100 100 0 0.00%
6700 7600 900 13.43% U
     
Net profit 5300 6400

c Comment:
The owner has not prepared his budgeted income statement correctly as he has included
several items that are neither revenues or expenses. Loans, drawings and GST
transactions should not be included in an income statement. Once these items are
removed from the report, the business has a predicted net profit of $5300, rather than a
net loss. The actual results are actually better than that predicted by the budget. With
cleaning fees being higher than expected, the actual net profit result was $6400, despite
incurring more wages expense than expected.

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 Case study
a Reservoir Roof Restorations
Cash budget for six months ending 30 June 2015
Jan Feb Mar Apr May Jun
Estimated receipts $ $ $ $ $ $
1310
Cash fees 0 15400 16500 13300 11400 9500
1310
Total receipts 0 15400 16500 13300 11400 9500

Estimated payments
Materials 3275 3850 4125 3325 2850 2375
Wages 4200 4200 5250 3800 3800 4750
Petrol 240 240 240 200 200 200
Service of truck 320
Insurance of truck 640
Registration of truck 540
Advertising 150 150 150 150 150 150
Purchase of equipment 1000 400 400 400 400
Office expenses 100 100 100 100 100 100
Loan repayment 1500 1500
Drawings 2000 2000 2500 2000 2000 2500
Total payments 9965 13360 13405 9975 11000 11015

Excess (deficit) for month 3135 2040 3095 3325 400 -1515
Bank balance start of
month 260 3395 5435 8530 11855 12255
Bank balance end of month 3395 5435 8530 11855 12255 10740

b When should the deposit on the vehicle be paid?

The earliest he should buy the new vehicle is in April. This leaves him with a safety margin of
about $1800. If Fieschi has doubts about this, he should delay the purchase until May. As the
business expects to have a negative cash flow in June, Fieschi may well hold off on his decision so
that the next quarterly budget can be prepared. The fact that the cash position is expected to drop
back to around $10000 by the end of June is a warning that the business may not be able to go
ahead with the purchase of the new vehicle. It should be kept in mind that, once the deposit of
$10000 has been paid, another $15000 still has to be paid in the future. This would put the cash
resources of this business under intense pressure.

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 c Redraft of the cash budget
Reservoir Roof Restorations
Cash budget for six months ending 30 June 2015
Jan Feb Mar Apr May Jun
Estimated receipts $ $ $ $ $ $
1310
Cash fees 0 15400 16500 14364 12312 10260
1310
Total receipts 0 15400 16500 14364 12312 10260

Estimated payments
Materials 3275 3850 4125 3591 3078 2565
Wages 4200 4200 5250 4400 4400 5500
Petrol 240 240 240 200 200 200
Service of truck 320
Insurance of truck 640
Registration of truck 540
Advertising 150 150 150 250 250 250
Purchase of equipment 1000 400 400 400 400
Office expenses 100 100 100 100 100 100
Loan repayment 1500 1500
Drawings 2000 2000 2500 2000 2000 2500
Total payments 9965 13360 13405 10941 11928 12055

Excess (deficit) for month 3135 2040 3095 3423 384 -1795
Bank balance start of
month 260 3395 5435 8530 11953 12337
Bank balance end of month 3395 5435 8530 11953 12337 10542

Comment: At first glance the new advertising strategy appears to be worthwhile. The predicted cash
balance for April increases from $11855 to $11953 (increase of $98). In May the change is from
$12255 to $12337 (increase of $82). However, in June the change is a negative result. Rather than
the expected balance of $10740, the reviewed budget predicts a balance of $10542, a reduction of
$198. This negative change is the result of the increase in wages and the fact that in June there are
5 pay days. The increase of $150 per week leads to an expected increase in wages for June of $750
($150 x 5). This payment eliminates any gains made in the area of revenue and therefore the
advertising plan should not be adopted. An alternative point of view is that the plan should be
adopted because it generates an increase in the market share for the business. The new advertising
is expected to generate new work, meaning that new opportunities will be created for ‘word of
mouth’ advertising. As long as customer satisfaction is high, it may well be that the new plan is just
what the business needs in the slower months of the year. This may well lead to a very busy period
in the following months! It is valid to argue that for around $200 (the net change in the budget) the
business may, in the long run, receive benefits outweighing this cost.

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