CASH BUDGET

Objective of cash budget

1. To estimate or plan future cash shortages/surpluses and allow time to make plans for dealing
with them
2. To monitor actual cash flows. Actual cash flows can be compared with budgeted cash flows.
This comparison can help to identify weaknesses in cash management

Cash budget depends on assumptions and estimate about

1. Budgeted sales and costs of sales

2. Assumptions about lagged receipts and payments, for example how long will it take for
receivables to pay what they owe, and how much credit will be taken from payables.

TYPES OF CASH BUDGET

There are two types of cash budget:

1. Receipts and payments budget. This is a forecast of cash receipts and payments based on
predictions of sales and cost of sales and the timings of the cash flows relating to these
items.
2. Statement of financial position forecast. This is a forecast derived from predictions of future
statement of financial positions. Predictions are made of all items excepting cash, which is
then derived as a balancing figure.

Format of cash budget

Period 1 period 2 period 3
Cash receipts
Cash sales
Cash from receivable
Cash from sales NCA
Receipts for asset disposal
Others
Total receipts
Cash payments
Payment to supplier
Payment for wages and salaries
Payment for overheads
Payment for NCA
Payment of dividend
Payment for interest on loan
Payment for tax
Total payment
NET CASH FLOW
ADD: OPENING BALANCE
CLOSING BALANCE

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LAGGED RECEIPTS AND PAYMENTS (pages 324)

- Based on forecast
- Forecast of sales and purchases
- Length of time lag between sales and receipt and purchase and payment
- Payment of wages and salaries usually paid in arrears at the end of the week or month. It is
therefore usual to assume that salaries are paid for in the same month as they are incurred.
- Payments for overhead expenses. Overheads expenses might be variable or fixed. Hight low
method might be apply here

For example, it might be estimated that for credit sales, 50% of customers will pay in the month
following sale, 30% two months after sale, 15% three months after sale and bad (irrecoverable) debts
will be 5% of credit sales.

2
To forecast cash position in the balance sheet we need to know

1. Changes to fixed assets (acquisitions and disposals)

2. Future inventory levels
3. Future debtor levels
4. Future payables levels.
5. Changes to share capital and other long-term funding (e.g. bank loans, debenture issue)
6. Changes to retained profits.

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FORECASTING

Planning

Forecasting
(An estimate of what might happen in the future)

In order for the organization to make a decision now whether they want to invest or how
much they want to produce,
they need to forecast first what are the future activities / demands / trends to ensure they
will get profit.

Using forecasting tools

High Low Method Correlation Regression Analysis Time

Series
(Line of best fit)
When we learn the relationship between two variables, we will discuss the following
questions statistically:

( Scatter Graph )
✔ Are the two Variables linearly related?

( Correlation Coefficient )
✔ If so, what is the strength of the linear relationship?

( Regression Analysis )
✔ What linear equation can be formed to describe the linear
relationship?
✔ What kind of predictions can be made from the regression
analysis?

Actual Time Series, Y, Component

Trend (T) Seasonal (S) Cyclical ( C ) Random ( R )

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 Underlying Long-Term Short Term fluctuations Medium term Randomly
Movement over time in the due to different fluctuation due to occurring
values of the data recorded. circumstances different circumstances residual
(longer time period than variations due
Seasonal) to
non-recurring
circumsatance
s

Moving Average
2 methods
Period

Odd Even Multiplying Additive

Eg. Years, Eg quarters Model Model
month
Y= T x S x R Y=T+S+R

EXAMPLE

Consider the following quarterly sales (in $000) for a business that experiences some seasonality:

ADDITIVE MODEL

Year Q Annual Moving average of 4 Seasonal variation Moving average of 4

sales $ (step 1) (step 2) Divide by 2
A T S=A-T
Year2022 1 85
2 62
3 66
4 108
Year 2023 1 96 ?
2 66 ?
3 71 (66+71+125+97)/4 =89.75 –18.75 (71.00 – 89.75)

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 4 125 (71 + 125 + 97 + 68)/4) +34.75 (125.00 – 90.25)
=90.25
Year 2024 1 97 (125 + 97 + 68 + 75)/4) +5.75 (97.00 – 91.25)
=91.25
2 68 (97 + 97 + 68 + 75+142)/4) ?
=?
3 75 ?
4 142

Once we have the information for the trend and the seasonal variation we can use this to forecast
sales for the future.

MULTIPLICATIVE MODEL

This model is used when the seasonal variation is not calculated as an absolute number but instead
as a percentage against the trend.

For example, an organisation selling ice cream may know that sales are 50% higher in quarter 2 than
the average trend for the year. In order to determine the forecast we therefore take the trend and
multiply by the seasonal variation.

The model is calculated in much the same way as in the additive model but the results will be
illustrated differently.

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Reasonableness of forecasting

1. Individuals who are in a good position to verify the accuracy of forecasts or estimates should
be consulted.
2. The assumptions in the budget should be checked for reasonableness.

Monitoring and controlling cash budgets

Who prepare?

Who responsible and check?

What to check