Preparing the cash budget

1
Preparing the cash budget
Lecture 4

• Cash receipts
• Cash disbursements
• Planned borrowing/repayment

2
Several Kinds of Budgets

Budgets

• Production and purchase budgets
• Overhead and support budgets
• Cash budget
• Proforma Income Statement
• Proforma Balance Sheet

3
Interrelated Budgets
Develop Sales Budget
Estimate Cash Inflows
Develop Purchase or Production Budget
Develop Other Expense Budgets
Estimate Cash Outflows
Combine for Income Budget
Combine for Cash Budget
4
Preparing the Cash Budget 1

• Determine cash receipts based on sales budget and
  collection assumptions
• Determine cash disbursements based on purchases
  budget, and budgets for overhead and support
  services
• Also budget capital expenditures for planned
  acquisitions

5
Preparing the Cash Budget 2

• Consider desired minimum balance in cash account
• If disbursements gt receipts beginning balance
  in cash
• Plan financing through short-term loans, etc.

6
Preparing the Cash Budget 3

• If receipts gt disbursements desired ending
  balance in cash
• Determine how to use excess
• First, repay existing short-term debt
• Other uses?
• Remaining amount to short-term investments

7
Cash Receipts Budget Example

• SCENARIO
• Cash Sales are 10 of Total Sales Revenue
• Accounts Receivable Collection History
• Month 1 40
• Month 2 45
• Month 3 10
• Uncollectable 5
• Total A/R 100

8
Cash Receipts Budget (cont.)

• Jan Feb Mar
• Total Sales 1,763,740
  1,869,560 1,958,000
• 10 Cash Sales - 176,374 - 186,956
  - 195,800
• Total Credit Sales 1,587,366
  1,682,604 1,762,200
• Collections
• Jan
• Feb
• Mar
• Total Cash
• Collections

9
Cash Receipts Budget (cont.)

• Jan Feb Mar
• Total Sales 1,763,740
  1,869,560 1,958,000
• 10 Cash Sales - 176,374 - 186,956
  - 195,800
• Total Credit Sales 1,587,366
  1,682,604 1,762,200
• Collections
• Jan
• Feb
• Mar
• Total Cash
• Collections

Project Collections for March
January and February sales are the actual sales
for period and we would know the actual
percentage of cash and credit sales we would
not need the 10 estimate used in budgeting.
10
Cash Receipts Budget (cont.)

• Jan Feb Mar
• Total Sales 1,763,740
  1,869,560 1,958,000
• 10 Cash Sales - 176,374 - 186,956
  - 195,800
• Total Credit Sales 1,587,366
  1,682,604 1,762,200
• Collections
• Jan
• Feb
• Mar
• Total Cash
• Collections

January sales 1,763.740 are collected as follows
(per information given) 10 immediately so the
remaining 90 (1,587,666) is collected Jan
40 1,587,366 634,946 Feb 45 1, 587,366
714,315 Mar 10 1,587,366
158,737 Uncollectable 5 (no cash receipt
projected)
Now we put these numbersin the
appropriate columns in our budget
11
Cash Receipts Budget (cont.)

• Jan Feb Mar
• Total Sales 1,763,740
  1,869,560 1,958,000
• 10 Cash Sales - 176,374 - 186,956
  - 195,800
• Total Credit Sales 1,587,366
  1,682,604 1,762,200
• Collections
• Jan 634,946
  714,315 158,737
• Feb
• Mar
• Total Cash
• Collections

January collections would also include 45 of
December sales and 10 of November sales but we
are concentrating on computing March
collections Your turn how much of February
CREDIT sales will be collected in February and
March? Next, what amount of March credit sales
will be collected in March?
12
Cash Receipts Budget (cont.)

• Jan Feb Mar
• Total Sales 1,763,740
  1,869,560 1,958,000
• 10 Cash Sales - 176,374 - 186,956
  - 195,800
• Total Credit Sales 1,587,366
  1,682,604 1,762,200
• Collections
• Jan 634,946
  714,315 158,737
• Feb
• Mar
• Total Cash Collections - March

13
Cash Disbursements 1

• Similar process is used to project WHEN invoices
  (accounts payable) will be paid
• Many expenses paid in month incurred
• Capital expenditures

14
Cash Disbursements 2

• Other cash disbursements to budget
• Payment of dividends to stockholders
• Repayment of amounts borrowed
• Short-term bank loans
• Scheduled payments on bonds and other long-term
  debt
• Lease payments (capital leases)

15
Cash budget proforma SCF

• The cash budget is essentially a statement of
  cash flows (SCF)
• Cash budget also provides information for
  completion of proforma income statement and
  proforma balance sheet

16
Watch out for

• If expense budget is used to prepare cash
  disbursements budget

• Operating expenses may include noncash items
• Operating expense will NOT show cash outflows to
  acquire long-lived assets or repay long-term
  debt, etc.

17
Practice Problems Set 8

• Exercise 4 a b White Glow Co.
• Cash receipts budget
• Exercise 5 (b, c d) Wet Plug Co.
• Purchase budgets
• Cash disbursements budget
• On pages 82-83 in text
• Due Tues, Feb. 22 (7 also due)
• To be graded in class for attendance points

You are doing 5a for PP 7
18
The Project

• You are now ready to complete ToyBox Trailers
  Cash Budget
• The completed project is due March 3 (Thursday)
  but will be accepted through Tuesday March 8 by
  1200 Noon
• Since I want to post the solution so you can
  study it before the exam, NO LATE ASSIGNMENTS can
  be accepted

19
Solutions to Examples
20
Cash Receipts Budget

• Jan Feb Mar
• Total Sales 1,763,740
  1,869,560 1,958,000
• 10 Cash Sales - 176,374 - 186,956
  - 195,800
• Total Credit Sales 1,587,366
  1,682,604 1,762,200
• Collections
• Jan 634,946
  714,315 158,737
• Feb 673,042
  757,172
• Mar
  704,880
• Total Cash
  1,816,589
• Collections

Includes 10 cash sales for month