Table 11.1: Important Components of a Cash Budget
| Cash inflows | |
| Operating: | Cash sales, collections from customer on account |
| Non-operating: | Investment income (dividend income, interest income), rental income, sales of assets, amount received from debt incurrence, royalty income |
| Cash outflows | |
| Operating: | Salaries expense, rent expense, purchase of materials and supplies, payments to vendors utilities expense |
| Non-operating: | Purchases of fixed assets, repayments of loans, tax expense, purchases of stock and bonds in other companies |
Example
| FRED’S SPORTS CENTER | |
| Cash BudgetJanuary 20×8 | |
| Cash balance, Jan. 1 | $50,000 |
| Add: Cash receipts from customers | 150,000 |
| Cash available | $ 200,000 |
| Less: Cash payments | |
| For inventory | $ 40,000 |
| Rent | 10,000 |
| Insurance | 5,000 |
| Utilities | 3,000 |
| Purchase of equipment | 2,000 |
| Salaries | 12,000 |
| Taxes | 10,000 |
| Total cash payments Cash balance, Jan. 31 | $ 90,000$ 110,000 |
How is it used and applied?
The cash budget allows you to review future cash receipts and cash payments to identify possible patterns of cash flows. In this way, you can examine your collection and disbursement efforts to ascertain if you are maximizing your net cash flows. Further, the cash budget reveals when and how much to borrow and when you will be able to pay the money back. For instance, if your cash budget indicates that a large cash outlay will be needed to purchase assets such as store fixtures, you may have to borrow money and determine a debt repayment schedule. In order to obtain a credit line lenders usually required you to submit a cash budget, among with your financial statements.
Comparing estimated and actual cash figures allows you to study the reasons for any major discrepancies and to take any corrective action. Variance analysis gives you an idea of your cash position and provides insight in improving cash estimates in the next budgeting period. It also aids in the periodic revision of projections. This updating usually occurs at the beginning of each budget segment (e.g., the first day of a quarter, or the first day of a month). Budgets should be modified immediately for significant changes. Table 11.2 shows a format that may be used for variance analysis.
Variance analysis is important for a business, whether it be a retailer, wholesaler, manufacturer, or service concern. Evaluation of cash variances may be performed yearly, quarterly, monthly, or daily. If theft is suspected, variance analysis should be done frequently. After all, cash is the easiest asset to steal.
Table 11.2: Variance Analysis Report for Cash Budgeting
12. Forecasting Cash Collections
Introduction
A forecast of cash collections and potential bad debts is an essential part of cash budgeting. The critical step in making such a forecast is estimating the cash collection and bad debt percentages and applying them to sales or accounts receivable balances.
How is it computed?
The historical trend in cash collections relative to sales should be examined for the past three years. An example illustrates the technique.
Example 1
Assume that an analysis by Mr. Jones, the owner of a clothing store, of collection experience for August sales revealed the following collection data:
| Description | Percent of total credit sales | |
| Collected in | August | 2.3 |
| September | 80.2 | |
| October | 9.9 | |
| November | 5.1 | |
| December | 0.5 | |
| Cash discounts | 1.0 | |
| Bad debt losses | 1.0 | |
| Total | 100.0 |
If next year’s August sales are expected to fall into the same pattern, then the calculated percentage for August credit sales can be used to determine the probable monthly distribution of collections. The same analysis applied to each month of the year will give a reasonably reliable basis for collection forecasting. The worksheet (August column) for cash collections might look as follows:
The following example illustrates how cash collection rates are used to generate a forecast of the cash collection porting of the cash budget.
Example 2
The following data are given for Sharpe’s Clothing Store:
Past experience based on the aging of accounts receivable indicates that collections normally occur in the following pattern:
The total cash receipts for November and December are computed as follows:
| November | December | |
| Cash receipts | ||
| Cash sales | $ 8,000 | $ 6,000 |
| Cash collections | ||
| September sales | ||
| $50,000 × 19% | 9,500 | |
| October sales | ||
| $48,000 × 80% | 38,400 | |
| $48,000 × 19% |
|