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CASH BUDGET
- 1. CASH BUDGET CONCEPT; BUDGET A budget is a plan of action expressed in quantitative terms ‘’OR’’ is a financial and quantitative statement prepared and approved prior to a defined period of time, it may include income, expenditure and the employment of capital. -Budget may be prepared for the business as a whole for the departments, for functionssuch as; - Sales and production - Financial and resource items such as; cash, capital, expenditures, purchases, manpower etc. - Examplesof budget are; Sales budget Productionbudget Purchasesbudget Productioncost budget Selling and distributioncost budget Cash budget Budgeted profit and loss a/c and balancesheet Benefits of budget i.) These are a way of compiled planning, that is, in the presence of s budgets, a firm has clear guidelines and the financial and human resources canbe utilized to achieve some specific targetsor objectives.
- 2. ii.) The budget helps to improve communication and co-ordination among the management and employees. iii.) These are used to determine and evaluate performance of the business enterprise. iv.) The budgets help to clarify the authority and responsibility of departmentalmanagersand other staffmembers. CASH BUDGET What isit? Cash budget is prepared to show the expected cash receipts and payments in next few monthsor one year period. Themainfunctionsof cash budget areto such that; i.) Ensure that cash is availablefor revenue expenditure. ii.) To indicate when, where and how much cash will be needed and whether , thisis permanent or temporary iii.) Preserve liquiditythroughout theyear iv.) Reveal surplus cash for investment or expansionof facilities v.) Guide management on financing capital expenditure internally or externally The cash budget is affected by the following; i.) Expansionor constructionofthe investment in fixed assets ii.) Increaseor decreasein stocks and debtors iii.) Rateof inflationanticipated iv.) Policydecisionslike credit controls, dividendsand taxation
- 3. -The cash budget is not affected by the following; i.) Provisionfor bad and doubtfuldebts ii.) Provisionfor depreciation → Anything that cannot involve movement of money does not affect the cash budget. Illustration1 The following information was extracted from the books of Box Ltd. A companywhich started tradingoneyear ago; MONTH/YEAR SALES PURCHASES April, 2008 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 ADDITIONAL INFORMATION; A. Cash in hand at the end of may, 2008will be 180’000 B. 60% of the sales proceeds are received in the current month, 30% in the following month and the balanceis received two monthsafter sale C. Suppliersarepaid one month after delivery of goods D. Corporation tax for 2007 amounting to 20’000 will be paid on 30th September 2008
- 4. E. Contractors retation money amounted to 50’000 will be paid on 30th June 2008 F. The shareholders at their last extra ordinary general meeting, increased the share capital by 70’000 and the first call of 40’000 will be received in October 2008 G. In October 2008, the company is due to receive 20’000/= as compensationfor a civilsuit H. The monthly administration expenses amounted to 33’000 include; factorydepreciationchargefor 4’000 and preliminaryexpensesof 3’000 I. Office equipment worth 13’000 will be paid for in November, 2008 a. Required; prepare a cash budget for the period from 1st June to 31st December.
- 5. WORKINGS; Receipts Sales * June 60% x 160,000 = 96,000 30% x 160,000 =48,000 10% x 150,000 = 15,000 159,000
- 6. Jul 60% x 170,000 =102,000 30% x 160,000 = 48,000 10% x 160,000 = 16,000 166,000 August 60% x 200,000 =120,000 30% x 170,000 =51,000 10% x 160,000 = 16,000 187,000 September 60% x 200,000 =120,000 30% x 200,000 =60,000 10% x 170,000 = 17,000 197,000 October 60% x 180,000 = 108,000 30% x 200,000 =60,000 10% x 200,000 = 20,000 188,000 November 60% X 180,000 = 100,000 30% X 180,000 = 54,000 10% X 200,000 = 20,000
- 7. 188,000 December 60% x 200,000 =120,000 30% x 180,000 = 54,000 10% x 180,000 = 18,000 192,000 ILLUSTRATION Draw a cash budget for S&S Co. Ltd showing the balanceat the end of each month from the following informationfor the six month ended 31 December 2012 a) Opening cash (including bank) balanceTshs 600 b) Salesat Tshs 20 per unit 2012 Marc h Apri l Ma y Jun e Jul y Augus t Septembe r Octobe r Novembe r Decembe r 130 100 120 145 200 150 175 200 195 200 Debtorspay their accountsthreemonthsafter that inn which sales are made. c) Productioninunits 2012
- 8. Marc h Apri l Ma y Jun e Jul y Augus t Septembe r Octobe r Novembe r Decembe r 120 135 150 160 175 185 190 170 155 125 d) Direct labour costs of Tshs. 8 per unit are payablein the month of production e) Raw materialsused in productioncostsTshs 5 per unit of this80% are paid in the m nth of production. f) Variableexpensesare Tshs. 2 per unit paid on half in the same month as productionand half in the month following production. g) Will receivea legacy of Tshs 1250 in December 2012 . h) Fixed expenses of Tshs 200 per month payableeach month. i) Drawing isto be Tshs 150 per month j) Machinerycosting Tshs1000 to be paid for in October 2012. SOLUTION ILLUSTRATION Workings PAYMENTS SCHEDULE July August Raw materials 160(July) x 4Tshs = 640 175 (Aug) x Tshs 4=700 150 (June) x1Tshs = 150 160 (July) x Tshs 1= 160 Direct labour 160 xTshs8 = 1280 175 x Tshs 8 =1400
- 9. Variable (150 x Tshs 1) +(160 x Tshs 1) = 310 (175 xTshs1) +(160 x1Tshs)=335 Fixed expenses = 200 =200 Drawings =150 =150 2730 2945 September October Raw materials 185(Sept) x 4Tshs= 740 190 (Oct) x Tshs 4=760 175(Aug) x1Tshs= 175 185 (Sept) x Tshs 1= 185 Direct labour 175 xTshs8 = 1480 190 x Tshs 8 =1520 Variable (185 x Tshs 1) +(175 x Tshs 1) = 360 (190 xTshs 1) +(185x1Tshs)=375 Fixed expenses = 200 =200 Drawings =150 =150 Machinery =1000 3105 4190 November December
- 10. Raw materials 170(Nov) x 4Tshs= 680 155 (Dec) x Tshs 4=620 190(October) x1Tshs=190 170 (Nov) x Tshs 1= 170 Direct labour 170 xTshs 8 = 1360 155 x Tshs 8 =1240 Variable (170 x Tshs 1) +(190 x Tshs 1) = 360 (155 xTshs 1)+(170x1Tshs)=325 Fixed expenses = 200 =200 Drawings =150 = 150 2940 2705 Receipt Schedule July August September October November December Sales units 100 160 145 200 150 175 Selling price(Tsh) 20 20 20 20 20 20 Collections 2000 3200 2900 4000 3000 3500 Legacy - - - - - 1250 Total Receipt 2000 3200 2900 4000 3000 4750
- 11. NOTE: All figureswith bracketsarenegativeamount meanson all months with negativecash there is bankoverdraft.