CASH BUDGET

WHAT DOES CASH BUDGET MEAN?

 The cash budget is a prediction of future cash receipts and expenditures
for a particular time period. It usually covers a period in the short term
future.
 Cash budget is a financial projection of cash disbursements and receipts
during the next planning period.

WHY PREPARE A CASH BUDGET?

A cash budget is important for a variety of reasons:

 Cash budget allows management to make decisions regarding the cash

position (or cash reserve). It is often used to assess whether the entity has
sufficient cash to fulfill regular operations and/or whether too much cash
is being left in unproductive capacities.

 A cash budget also helps the management to determine when the

company will need to seek outside financing. It is used to assess whether
there are periods during operations cycle when the business might need
short-term borrowing. It will also helpful in assessing any long-term
borrowing needs. Basically, a cash budget is a planning tool for
management decisions.

 A cash budget also allows the firm to evaluate and plan for capital needs.

 Without cash budget management may be unaware of the cash flow

through the business. At the end of a year or a business cycle. A series of
monthly cash budgets will show how much cash is coming into company
and the way it is being used. Seasonal fluctuations will be made clear.

 A cash budget is extremely important, especially for small businesses,

because it allows a company to determine how much credit it can extend
to customers before it begins to have liquidity problems. For individuals,
creating a cash budget is a good method for determining where their cash
is regularly being spent. This awareness can be beneficial because

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 knowing the value of certain expenditures can yield opportunities for
additional savings by cutting unnecessary costs.

HOW TO CREATE A CASH BUDGET

The cash budget is prepared after operating budgets (sales, manufacturing

expenses or merchandise purchases, selling expenses, and general and
administrative expenses) and the capital expenditure budget are prepared.

The cash budget starts with the beginning cash balance to which is added the
cash inflows to get cash available. Cash outflows for the period are then
subtracted to calculate the cash balance before financing. If this balance is below
the company's required balance, the financing section shows the borrowings
needed.

There are three main components necessary for creating a cash budget.
• Time period
• Desired cash position
• Estimated sales and expenses

TIME PERIOD
The first decision to make when preparing a cash budget is to decide the period
of time for which the budget will apply.

CASH POSITION
The amount of cash to keep on hand will depend on the nature of the business,
the predictability of accounts receivable, and the probability of fast-happening
opportunities (or unfortunate occurrences) that may require to have a significant
reserve of cash. Budgeting process will help to determine if, at the end of the
period, the organization has an adequate cash reserve.

ESTIMATED SALES AND EXPENSES

The fundamental concept of a cash budget is the estimation of all future cash
receipts and cash expenditures that will take place during the time period. The
most important estimate that should be made, however, is an estimate of sales.
Once this is decided, the rest of the cash budget can fall into place.

For example, if an increase in sales of 10 percent is desired and expected, various

other accounts must be adjusted in the budget. Raw materials, inventory and
other costs of goods sold must be revised to reflect the increase in sales.
Additionally, an assessment should be made to see whether there is need to
make additions to selling, general and administrative expenses, or can the

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increased sales be handled by current excess capacity. Also, how will the
increase in sales affect payroll and overtime expenditures?

Instead of increasing every expense item by 10 percent, serious consideration

needs to be given to certain economies of scale that might develop. In other
words, perhaps, a supplier offers a discount if you increase the quantities in
which you buy a certain item; or, perhaps, the increase in sales can be easily
accommodated by the current sales force. All of these types of considerations
must be taken into account before you start budgeting. Each type of expense (as
shown on your income statement) must be evaluated for its potential to increase
or decrease. The estimates should be based on the experience of running the
business and on business goals over the time frame for which the budget is being
created.

AT A MINIMUM, THE FOLLOWING CATEGORIES OF EXPECTED CASH

RECEIPTS AND EXPECTED CASH PAYMENTS SHOULD BE
CONSIDERED:
Expected Cash Receipts:
• Cash balance
• Cash sales
• Collections of accounts receivable
• Other income

EXPECTED CASH EXPENSES:

• Raw material (inventory)
• Payroll
• Other Direct Expenses:
• Advertising
• Selling expenses
• Administrative expense
• Plant and equipment expenditures
• Other payments

EXPECTED CASH RECEIPTS

• Cash balance - The cash balance is the cash on hand. This includes what is in
checking accounts, savings accounts, petty cash and any other cash accounts that
the business has might have.

• Cash sales - After arriving at a base figure of cash sales, it must be adjusted for
any trade or other discounts and for possible returns. The base level of sales (and
of accounts receivable) will be determined by the company’s projections, goals
and past experience.

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• Collections of accounts receivable - After a base level of accounts receivable is
established (based on sales projections), it must be adjusted to reflect the amount
that will actually be paid during the time period. Of course, past experience will
be the most reliable indicator for making these adjustments.

• Other income - The cash position may be affected positively by income other
than sales. Perhaps there are investments, dividends, or a loan that will be
introducing cash to the company during the time period. These types of cash
sources are referred to as “other income.

EXPECTED CASH EXPENSES

• Raw materials (inventory) - For small business retailers and manufacturers,
the largest cash expense is usually the amount spent for inventory or raw
materials. Again, past experience will be your best indicator of future cash
outlays. But don’t forget to factor in any necessary increases to keep up with
projected sales. You may also want to consult with your suppliers as to whether
any pricing changes are expected.

• Payroll - Salaries are commonly the second largest expense item during an
accounting period.

• Advertising - The role of advertising varies by type of business. If an increase

in sales is projected, is there an accompanying marketing or advertising
campaign? These costs must be budgeted. Include any expenses for printing
(brochures, mailers, and newspaper ads), radio, or other advertising services.

• Selling expenses - Typical selling expenses include salaries and commissions

for sales personnel and sales office expenses. However, this line item can also
include any traveling or other sales-related expense not covered elsewhere.

• Administrative expenses - General office expenses are included here. This will
include utilities, telephone, copying and day-to-day office expenses. Unless big
changes are underway, past experience will guide in evaluating future
administrative expenses.

• Plant and equipment - Cash payments for equipment loans, mortgages,

repairs, or other upkeep should be included here. Past experience will, again, be
a guide.

• Other payments - If there are any cash payments you expect to make that are
not covered in the above listing, include them here. (If they are repeatable, you

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may consider adding a separate line item.) However, typically, interest payments
and taxes fall here.

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REVIEW QUESTIONS

QUESTION ONE
From the information below, prepare a cash budget for the period from January
to April.
Expected Sales Expected Purchase
$ $
Jan. 60,000 Jan. 48,000
Feb. 40,000 Feb. 80,000
Mar. 45,000 Mar. 81,000
Apr. 40,000 Apr. 90,000

The wages to be paid to workers amount to $5,000 each month. Also, the bank
balance on 1st January was $8,000. The management decided on the following:

i) If the deficit fund is within the limit of $10,000, it is possible to make

arrangements with the bank.
ii) If the deficit fund exceeds $10,000 but is within the limit of $42,000, the
issue of debentures is preferred.
iii) If the deficit fund exceeds $42,000, the issue of shares is preferred
(considering the fact that it is within the limit of authorized capital).

QUESTION TWO
On the basis of the following information prepare a cash budget for Rinah
Investment Ltd for three months ending march 31st 31 2014
a) Prices and costs are assumed to remain constant.
b) Credit sales are 70% of the total sales.
c) Credit sales are collected after one month.
d) Actual and forecast sales are as follows:

Actual Tshs
December 65,000,000

Forecast
January 70,000,000
February 75,000,000
March 80,000,000

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 e) Estimated purchases for raw-materials are as follows:
January 40,000,000
February 35,000,000
March 45,000,000

Suppliers are paid in the same month of the purchase.

f) The company has a cash balance of 15,000,000/= as at 31st December 2013

which is the minimum balance to be maintained.
g) The business expects to incur the following expenses per month:

Tshs
Salaries 10,000,000
Administrative expenses 4,500,000
Plant & equipment expenses 5,000,000
Other direct expense 2,000,000
Other payments 600,000

h) Payment for advertising of 3,000,000/= is to be made in January.

i) Selling expenses are 5% of the monthly total sales.

QUESTION THREE
Elegant Ltd is a manufacturer of garments. The company has been facing cash
problems and has invited you, as an expert to advice on estimating its needs for
funds during the period of June to November 2012. The estimated sales
projections are as follows:
Month Tshs ‘000’ ‘000’
June 400
July 300
August 500
September 900
October 800
November 700
December 500

According to company’s credit policy, 25% of sales are cash, the balance being
credit.

60% of the credit sales are collected in the month following the sale and the
remainder in the second month following the sale.

The sales of April and May were 600,000,000/= and 500,000,000 respectively.

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Elegant Ltd pays 70% of the sales price for raw materials and makes its
purchases two month in advance of sales.

The suppliers are however paid one month after the purchase.

The company incurs 35,000,000/= per month for rent and 80,000,000/= per
month for salaries and administrative expenses. These payments are made in the
month in which they are incurred.

Quarterly tax deposits of 90,000,000/= are to be made in August.

The company has cash balance of 60,000,000/= as at May 2012 and wishes to
have a minimum balance in any month of 50,000,000/=.

Required: Prepare a cash budget for the business

QUESTION FOUR
On the basis of the following information, prepare a cash budget for Barbara
Investment Ltd for six months of 2012.
i) Price and costs are assumed to remain constant.
ii) Credit sales are 70% of total sales.
iii) 60% of credit sales are collected after one month, 25% after two months
and 15% after three months.
iv) The company expect profit margin of 30%.
v) Anticipated sales of each month are purchased and paid in the
preceding month.
vi) Forecast sales are as follows:
Tsh
Jan 2012 1,200,000/=
Feb 2012 1,600,000/=
March 2012 1,600,000/=
April 2012 2,400,000/=
May 2012 2,000,000/=
Jun 2012 1,600,000/=
July 2012 2,400,000/=
vii) The anticipated operating expenses are:
Jan 2012 320,000/=
Feb 2012 320,000/=
March 2012 400,000/=
April 2012 400,000/=
May 2012 320,000/=
Jun 2012 280,000/=
viii) Interest on 12% debenture of 2,000,000/= is to be paid each quarter.

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 ix) Advance tax of 200,000/= is due in April.
x) A purchase of equipment of 240,000/= is to be made in June.
xi) The company has cash balance of 8,000,000/= as at 31December
2011Which is the minimum balance to be maintained.
xii) Casual expenses are 16,000/= per month.

QUESTION FIVE
From the following information and assumptions prepare a cash budget
The cash balance in the hand on 1 January 2014 is Tshs.72, 500,000.
Month Sales Materials Wages Production Office and
purchased Overheads selling
overheads
Tshs 000 Tshs 000 Tshs 000 Tshs 000 Tshs 000
January 72,000 25,000 10,000 6,000 5,500
February 97,000 31,000 12,100 6,300 6,700
March 86,000 25,500 10,600 6,000 7,500
April 88,600 30,600 25,000 6,500 8,900
May 102,500 37,000 22,000 8,000 11,000
June 108,700 38,800 23,000 8,200 11,500
Assume that 50% of total sales are cash sales. Assets are acquired in the months
of February and April. Therefore, provisions should be made for the payment of
Tshs.8, 000,000 and Tshs.25, 000,000 for the same. An application has been made
to the bank for the grant of a loan of Tshs.30, 000,000 and it is hoped that it will
be received in the month of May.

It is anticipated that a dividend of Tshs.35, 000,000 will be paid in June. Debtors

are allowed one month’s credit. Creditors for materials purchased and overheads
grant one month’s credit. Sales commission at 3% of sales is paid to the salesman

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QUESTION SIX
The following information was extracted from the books of Box ltd, a company
which started trading one year ago.
MONTH SALES PURCHASES
2018 Sh Sh
April 150,000 100,000
May 160,000 110,000
June 160,000 90,000
July 170,000 90,000
August 200,000 80,000
September 200,000 130,000
October 180,000 140,000
November 180,000 60,000
December 200,000 60,000

The following additional information is available:

(a) Cash in hand at the end of May 2018 will be Shs 180,000
(b) 60% of the sales proceeds are received in the current month 30% in the
following month and the balance is received two months after sale.
(c) Suppliers are paid one month after delivery of goods
(d) Corporation tax for 2017 amounting to sh. 20,000 will be paid on 30th
September 2018.
(e) Contractors retention amounting to Shs. 50,000 will be paid on 30th June
2018
(f) The shareholders at their last extraordinary general meeting increased
share capital by sh.70,000 and the first call of sh. 40,000 will be received in
October, 2018.
(g) In October 2018, the company is due to receive Sh. 20,000 as compensation
for a civil suit.
(h) The monthly administration expenses amounting to Sh.33,000 include
factory depreciation charge of Sh, 4,000 and preliminary expenses of Shs,
3,000.
(i) Office equipment worth Sh. 13,000 will be paid for in November 2018.
REQUIRED: Prepare a cash budget for the period 1st june to 31st
December 2018

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QUESTION SEVEN

On the basis of the following prepare the cash budget of JBL Manufacturing Co.
for the first six month of 2016.
1. Prices and cost are assumed to remain unchanged.
2. Credit sales are 75% and cash sales are 25% of total sales
3. 60% of credit sales are collected in the month after the sales, 30% in the
second month and 10% in the third month.
4. No bad debts are expected.
5. Sales forecasts are as follows:

PERIOD TSHS
000
2015 October
120,000
November
140,000
December
160,000
2016January
60,000
February
80,000
March
80,000
April
120,000
May
100,000
June
80,000
July
120,000

6. The company has the gross profit margin of 20%

7. Anticipated sales of each month are purchased and paid in the preceding
month.
8. The anticipated wages and salaries are as below:
PERIOD TSHS 000

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 2016January 12,000
February 16,000
March 20,000
April 20,000
May 16,000
June 14,000
9. Interest on Tshs.20,000,000 of 6% debenture is due on calendar quarter
10. A tax prepayment on 2011 income of Tshs.20,000,000 is due in April
11. A company has a cash balance of Tshs.40, 000,000 at 31 December 2015,
which is the minimum desired level of cash. Funds can be borrowed in
multiples of Tshs.2, 000,000 on a monthly basis at 6% p.a.
12. A capital expenditure of Tshs.12, 000,000 is planned in June.
13. Interest is payable on the first day of the month following the borrowing
and is not accrued
14. Rent is Tshs.800,000 per month.

QUESTION ELEVEN
The following sales figures are for the months of November 2015 to June 2016.
The figures from January 2016 onward are estimated:

Half the sales are normally paid for in the month in which they occur and the
customers are rewarded with a 5% cash discount. The remaining sales are paid
for net in the month following the sale.

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(ii) Goods are sold at a mark-up of 25% on the goods purchased one month
before sale. Half of the purchases are paid for in the month of purchase and a 4%
prompt settlement discount is received. The remainder is paid in full in the
following month.

(iii) Wages of $12000 per month are paid in the month in which they are earned.
It is expected that the wages will be increased by 10% from 1 March 2016.

(iv) Rent will cost $60000 per annum payable three monthly in advance in
January, April, July and December each year.

(v) The directors have arranged a bank loan of $60000 which would be credited
to company’s current account in February 2016.

(vi)The half-yearly interest on 200000, 8% debentures of $1 each is due to be paid

on 15 January 2016.

(vii) The ordinary dividend of $12000 for the year 2015 will be paid in March
2016.

(viii) The bank balance at 31 December 2015 is $12000.

Required:

Prepare a cash budget for the four months ended 30 April 2016. Give your
answers to the nearest dollar ($).

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