The Steps to Create a Cash Budget When you are running a business, cash flow is one of the most

critical aspects of your success. Without enough cash on hand, your business could end prematurely, even if sales are strong. Creating a cash budget can help you determine how much cash you need on hand to be successful. 1. Determine Duration o A cash budget will help you determine how much money you will spend and bring in during a certain period of time. When creating a cash budget, determine the length of time that your budget will cover. Some businesses use a cash budget on an annual basis while others like to use a quarterly cash budget. Some businesses go even further and create a monthly cash budget. This allows you to focus on a specific period in the life of your business. Cash Inflows o One of the most essential parts of the cash budget is determining how much cash you will bring in during the specific period for the budget. For example, if you are using a monthly budget, project how much you will be bring in during that time. Look at how much you project for sales and any other sources of cash that you could count on. Expenses o You also need to determine how much you will have in expenses. These expenses could include anything that you will pay with cash during the time period. If you have to pay for it during the budget period, you need to include it in your cash budget. This will give you an idea of how much money is left over if everything goes as projected. Making Changes o If you do a cash budget and you determine that you will not have enough money to meet your obligations, you have to make some changes. This might include eliminating some expenses or figuring a way to increase cash inflows. You might even need to take out some type of business loan so that you can cover your expenses during the period of the budget. If you do not make the necessary changes, you may be out of business sooner than you had planned.

HOW TO CREATE A CASH BUDGET There are three main components necessary for creating a cash budget. They are: y Time period y Desired cash position y 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 your budget will apply. That is, are you preparing a budget for the next three months, six months, twelve months or some other period? In this Business Builder, we will be preparing a 3-month budget. However, the instructions given are applicable to any time period you might select. Cash Position The amount of cash you wish to keep on hand will depend on the nature of your business, the predictability of accounts receivable and the probability of fast-happening opportunities (or unfortunate occurrences) that may require you to have a significant reserve of cash. You may want to consider your cash reserve in terms of a certain number of days' sales. Your budgeting process will help you to determine if, at the end of the period, you have an adequate cash reserve. Estimated Sales and Expenses The fundamental concept of a cash budget is estimating all future cash receipts and cash expenditures that will take place during the time period. The most important estimate you will make, however, is an estimate of sales. Once this is decided, the rest of the cash budget can fall into place. If an increase in sales of, for example, 10 percent, is desired and expected, various other accounts must be adjusted in your budget. Raw materials, inventory and the costs of goods sold must be revised to reflect the increase in sales. In addition, you must ask yourself if any additions need to be made to selling or general and administrative expenses, or can the 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. Your estimates should be based on your

experience running your business and on your goals for your business 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: y Cash balance: o Expected cash receipts o Cash sales o Collections of accounts receivable o Other income y Expected cash expenses: o Raw material (inventory) o Payroll y Other direct expenses: o Advertising o Selling expenses o Administrative expense o Plant and equipment expenditures o Other payments

What Are the Uses of Cash Budgeting Procedures? Original post by Michael Wolfe of Demand Media After a company has prepared its operating budget, it will often draw up a separate cash budget as a means of tracking income and cash expenditures throughout the year. Such a budget has a number of practical uses, all of which center around being able to accurately predict when the company will be flush and when cash flow may be restricted. Map Inflows and Outflows The primary use of a cash budget is that it allows a company to map out expected inflows and outflows of cash during a specified period of time, usually a year. This map will take into account when the company expects to receive revenues and when it may need to spend those revenues on expenses not covered in the operating budget. This serves as a road map, giving the company a rough outline of how much cash it will need during the year. Predict Cash Shortages One advantage of cash budgeting is that this method can be used to accurately predict when the company will have less cash on hand than it might need to run the business. This gives the company the option to plan ahead and either shift cash inflows or obtain additional funds in advance. By predicting cash flow trends, the company can avoid having a midyear cash crunch. Show Potential Surpluses In addition to predicting cash shortages, cash budgeting is an excellent tool for predicting when a company will have more money than it would normally expect. By detecting surpluses, particularly long-term surpluses, the company can potentially target other uses for this money. Investing the money back into the business is generally more profitable in the long term than keeping large cash reserves. Calculate Borrowing If the company discovers in the course of preparing its cash budget that it will have a cash shortage that cannot be resolved by diverting funds from other sources, the company may choose to borrow money. By knowing how much cash it will have on hand, the company will be able to ascertain how much money it needs to borrow as well as when it will be able to repay the loan.

o How to Construct Pro Forma Statements Pro forma financial statements are documents that project a company's upcoming financial activity. They are usually prepared as part of a business plan and submitted to potential sources of financing such as banks and investors. Pro forma statements should be constructed to include the standard financial projections that belong in every business plan: balance sheet, income statement and cash flow projection. In addition, a pro forma should include a list of the assumptions on which it is based. 1Construct a pro forma income statement detailing your expected business earnings and expenses during the period covered by your business plan. For each year, list each category of income, along with the amount of revenue you expect it to generate. Total your sources of income to calculate your gross pro forma earnings. Also list each category of expenses that your business typically incurs, such as rent, labor and materials, and add these figures to calculate your gross pro forma expenses. Subtract your pro forma expenses from your pro forma earnings to figure your net pro forma income. 2 Construct a pro forma cash flow projection. Use a spreadsheet and label each column with the months of the year, using the far left column to label your categories of cash and expenditures. Label the top line in the left hand column "Incoming Cash" and list each source of revenue on the top part of the page, including investment funds and loans, and income from business sales. Label the bottom section of the page "Outgoing Cash" and list each type of expense your business incurs, including payroll, loan payments, and interest payments. Enter the amounts you expect your business to earn and take in on a monthly basis in each of the categories you have listed. Subtract each month's outgoing cash from that month's incoming cash, and use the resulting figure as the available capital at the outset of the following month. 3 Construct a pro forma balance sheet. Use the top portion of the page to list all of your projected assets at the end of the period covered by the business plan, such as cash reserves, equipment value, and inventory. Use the bottom portion of the page to list your projected liabilities at the end of the period covered by the business plan, including outstanding debts and accounts payable. Subtract your projected liabilities from your projected assets to calculate your pro forma net worth.

4 List the assumptions you have made in constructing your pro forma, such as projections that your sales will increase by ten percent per year during the period covered by the business plan. Include details about how you believe the funds you are requesting in your business plan will help to generate additional income. Be specific, and quantify each of your assumptions. What is the difference between independent and mutually exclusive projects? An independent project is one in which accepting or rejecting one project does not affect the acceptance or rejection of other projects under consideration. Therefore, no relationship exists between the cash flows of one project and another. A mutually exclusive project is one in which the acceptance of one precludes the acceptance of other projects.

Capital Expenditure Authorization (CEA) Process Capital Expenditures A Capital Expenditure is the amount used during a particular period to acquire or improve long-term assets such as property, plant or equipment. A Capital Asset is a long-term asset that is not purchased or sold in the normal course of business. Generally, it includes fixed assets, e.g., land, buildings, furniture, equipment, fixtures and furniture. The university accounts for these expenses as assets rather than operating expenses, because they are resources which have extended, useful lives. For example, a classroom will be utilized for many years, whereas office supplies will not. Capital Expenditure Authorization Process The Capital Expenditure Authorization (CEA) Process begins when a department or school identifies the need for a specific project or capital equipment purchase. Capital Authorization Requests are requested, authorized and managed in an electronic web-based system. 1. Department or school representative determines a need for a Capital Expenditure Authorization (CEA). 2. Department or school representative gathers information and documents specific, written details of what the expenditure will constitute, accompanied by a justification addressing the necessity of the expenditure. Department or school representative must contact the Budget and Fiscal Officer (BFO) of their respective school, prompting the need for processing a CEA request. In doing so, one must forward all related information as an attachment, including: o Name of Individual Requesting o Name of Individual Responsible (for managing project) o Associated department/school o Location of the project (campus) o Project Title o Cost/Expenditure breakout o Equipment Type (if applicable) o Justification of its need and all recommended funding sources (if known) The BFO then performs a needs assessment of the request. If the request meets all associated requirements and is deemed fiscally prudent, he/she will move to designate the funding source(s) and record the request into the Tufts University CEA System.

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Once recorded into the University CEA System, the request routes through a system generated approval workflow (which varies, depending upon CEA type, project location, funding sources and amounts)

7. Once all approvals have been gained, the

request becomes a project and representatives within the General Accounting Office will

systematically assign a Project/Grant number and authorize its budget within the PeopleSoft Financials system. 8. All capitalized expenses related to the CEA can then be charged to the Project/Grant number assigned and managed/tracked within PeopleSoft.

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The Capital Expenditure Process Capital expenditures are expenditures that will help a business produce revenues in more than one time period. In contrast with revenue expenditures that are recorded as single-period expenses, capital expenditures are recorded as assets so that their values can be amortized over time in much the same manner as normal assets. Capitalized expenditures possess residual values, useful lifespans and are disposed of at the end of their usefulness in the same manner as normal assets. Matching Principle Matching principle in accrual basis accounting requires that costs be recognized in the same time period as the revenues that their occurrence helped produce. Capital expenditures exist because their occurrences help produce revenues across multiple time periods, meaning that their values should be spread out and recorded as expensew in each of the periods in which their occurrence helped produce revenue. Capitalization Capitalization is the act of recording an expenditure as an asset rather than an expense. Capital expenditures have their entire values recorded as assets upon capitalization. For example, $100,000 in research and development costs for a patent is recorded as $100,000 in patent when capitalized. Amortization Capitalized expenditures have their values written off as amortization expense over the multiple time periods of their usefulness. Accountants amortizing capitalized expenditures can choose to either write amortization expenses in each period as a direct detriment to the asset or accumulate it as a contraasset that represents how much the asset has lost in value. End of Usefulness Capitalized expenditures have their values reduced to zero at the end of their usefulness in the same manner as other assets that are either depreciated or amortized. If the accountant chose to record amortization expense as a direct detriment to the asset, that asset should have the last of its value written off as the amortization expense of its last period, and no further accounting is required. If the accountant chose to record the expenses as a contra-asset, then both the asset and the contraasset are written off completely at the end of the asset's usefulness, thus preventing a one-time single-period loss from the asset's disposal that would distort the business's income statement.