THE CASH BUDGET

Cash Budget as a Planning Tool

• Cash budget is an important management

control tool especially during recession
• Indicates forecasts of receipts (cash inflows) &
payments (cash outflows) during the budget
period.
• Incorporates both revenues & capital items
• Forecasts of cash receipts & payments are
tabulated to reflect the forecast cash bal at
certain intervals.

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 Example of a Cash Budget
Oct Nov Dec
Forecast Cash Receipts P P P
Credit sales 1400 1650 1700
Cash sales 300 400 450
Total cash receipts 1700 2050 2150
Forecast Cash Payments
Credit Purchases 800 780 1050
Wages 300 350 350
Fixed assets - 1600 -
Loan repayt 250 - -
Total cash payments 1470 2850 1520
Net Surplus/Deficit 230 (800) 630
Bal b/f 120 350 (450)
Bal c/f 350 (450) 180
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 Importance of the Cash Budget

• An important tool in financial planning

• Reflects the cash-effect of the
budgetary plans
• Thus can lead to adjustments in other
budgets if it indicates insufficient cash
resources
• Indicates to mgt problems that are
likely to arise

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Possible cash positions & mitigation
measures by mgt

Short-term deficit: mgt action include

• increasing creditors/increasing payables
deferral period
• Reducing debtors/reducing receivables
collection period
• Arrange an overdraft

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 Contin…

Short-term surplus : Mgt action include

• Reduce payables deferral period/make early
payts to creditors & enjoy discounts
• Increase debtors/increase receivables
collection period
• Invest in short-term securities

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 Contin…

Long-term deficit: Mitigation Measures include

• Raise long-term finance e.g. Thru issuing shares
• Disinvest/Shutdown

Long-term surplus – Mitigation measures include

• Invest in long-term securities
• Expand the business
• Diversify
• Update/Replace fixed assets
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 Profit made ≠ Cash position
Reasons

Some cash receipts do not affect income statement e.g. cash

received in advance
Some cash payments have no effect on the profit made e.g.
prepayments
Non-cash items such as depreciation & provision for bad debts
do influence profit but not cash position
The incurrence of costs/expenses & the realisation of income
(recorded in the income statement) may not coincide with the
timing of receipts & payments (recorded in the cash budget /
in cashflow statement)
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 Contin…
• E.g. Tax on the taxable profits for 2021 may be paid in
2022. Or a dividend may be declared in 2022 but
payment made in 2023.
• Hence, for mgt, the cash budget is a better financial
planning tool than the income statement in ensuring
sufficient cash balance in the company.

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 Rolling Budget

• This is a cash budget involving continuous

budgeting i.e. regularly adding to the existing
budget a new future period whilst removing
the earliest period.
• Thus, the budget needs to constantly revised
so as to reflect the most recent / up to date
company position.

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 Example: Cash Budget

• You just completed your first degree in

Finance from UB and have just landed a job
with Radikoko’s Poultries. A farm specializing
in the production of chickens and selling to big
grocery stores in Botswana & the whole of
Southern Africa .
• At your first day at work you find some papers
with the following information put at your
desk by your immediate boss.
 Contin…

• The farm’s budget managers have estimated

sales for 2017 to be as follows:
May June July Aug Sep Oct Nov Dec
P200 250 300 400 500 350 250 200

• Sales are on terms of 2/10, net 30.

• From experience, 20% of customers pay
during the month of sale, these are discount
customers.
 Contin…
• 70% pay in the month immediately following
the sale &
• 10% pay in the second month following sale
• Purchases are 70% of next months sales and
are paid for, 30 days after acquisition.
• Wages, lease payments and other expenses
are estimated and put in the budget by
management and are given for Jul thru Dec.
 Contin…

• Estimated tax payments for Sep & Dec are

P30million & P20million respectively.
• P100million payment for new plant must be
made in October.
• Radikoko’s Poultries has a target cash balance
of P10 million and plans to borrow to meet
this target or invest surplus funds if it
generates more cash than is needed.
 Contin…

• At the end of this information, they is a note

which reads.
• As a fresh finance graduate you asked to use
you fresh mind and prepare a cash budget for
Radikoko’s Poultries
• Particularly : Calculate what is the estimated
monthly cash surplus or shortfall for the
month of July Thru Dec 2023.
 Solution

• See the excel sheet posted with your notes on

Black board for the solution.