CASH BUDGET

Cash budget is a statement that shows the firm

projected cash inflows and outflows over specified period of time. Cash budget can be constructed on a monthly, weekly, or even a daily basis. It allows a firm to develop cash management strategies (firms needs for borrowings for cash deficit or to make investment plans for any surplus cash it may have).

STEPS TO DEVELOP CASH BUDGET

STEP 1: Determine the amount of cash

receipt/cash inflows. Example of cash inflows are cash and credit sales, account receivable, other non-operating income (receipt of rental properties, dividend received and interest received) STEP 2: Determine the amount of cash disbursement/ cash outflow. Example of cash outflow are purchases and whether it come from operation (rental, selling and administration, interest payment and dividend payment).

STEPS TO DEVELOP CASH BUDGET

STEP 3: Determine the net cash flow:

Net Cash Flow = Total Cash Receipt/Total Cash Inflow Total Cash Disbursement/Total Cash Outflow
STEP 4: Determine whether we get

Surplus/shortage of cash

REMEMBER DONT INCLUDE DEPRECIATION IN CASH BUDGET WHY ? BECAUSE: NON-CASH EXPENSES (DEPRECIATION) DOES NOT INVOLVE ACTUAL CASH FLOWS, THEREFORE IT IS NOT PART OF THE CASH BUDGET

FORMAT FOR CASH BUDGET

Cash Budget of XYZ Company for the first month ending 31st January 1995
1. Total Cash Inflows/Receipt Cash Sales Credit Sales Dividends Received Interest Received Proceed from sales of fixed asset Proceed from sale of shares Total Cash Inflow/Receipt 2. Less: Total Cash Outflows/Disbursement Cash purchases Credit purchases Purchase of fixed asset Dividend payment Interest payment Total Cash Outflow/Disbursement Net gain/(loss) Total cash inflow Total cash outflow Beginning cash balance Ending cash balance Less: minimum cash balance Surplus/(shortage) RM XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX (XX) XX

Note: Ending balance for January 1995 will be beginning cash balance for February 2005

EXAMPLE
Given the following information, construct cash

budget for first quarter of 1995. 1. Estimated sales (1995) January RM 150,000 February RM 210,000 March - RM 210,000 April - RM 300,000 Actual sales (1994) October RM 300,000 November RM 350,000 December RM 400,000

2. Operating expenses requiring cash are estimated at: Jan Feb Mac Salaries & wages RM30,000 RM40,000 RM40,000 Rental RM2,000 RM2,000 RM2,000 Interest 6% of RM7,500 RM500,000 Depreciation RM2,500 RM2,500 RM2,500 3. The corporate tax is 40% and this will be paid in May 4. Sales are 75% credit and 25% cash. 5. Collections on credit sales are as follows: 60% - collected within the first month after sales 30% - collected within the second month after sales 10% - collected within the third month after sales.

6. Raw materials which are purchased one month in advance of sales are paid for in the month purchased. However, starting in March purchases will be paid for the month following purchase. (purchases are 80% of sales) 7. Wages and rent are paid in the month incurred. 8. Interest on long term debt is paid quarterly. 9. A quarterly dividend of RM2000 on common stock is to be paid in March. 10. The ending cash balance for December 1994 is RM100,000. The company also intends to maintain a minimum cash balance of RM100,000 every month. 11. The firm expects to sell common stock in March with net proceeds of RM500,000 12. A new equipment is to be purchased in March for RM400,000. 13. Long-term debt amounting to RM100,000 is to be redeemed in February 1995.

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