Cash Budget
Cash budget is a financial budget prepared to calculate the budgeted cash inflows and outflows during a period and the budgeted cash balance at the end of the period. Cash budget helps the managers to determine any excessive idle cash or cash shortage that is expected during the period. Such information helps the managers to plan accordingly. For example if any cash shortage in expected in future, the managers plan to change the credit policy or to borrow money and if excessive idle cash is expected, they plan to invest it or to use it for the repayment of loan.
All businesses need to maintain a safe level of cash to enable them to carry on business activities. The managers of a business need to determine that safe level. The cash budget is then prepared by taking into consideration, that safe level of cash. Thus, if a cash shortage is expected during a period, a plan is made to borrow cash.
Cash budget is a component of master budget and it is based on the following components of master budget:
Schedule of expected cash collections
Schedule of expected cash payments
Selling and administrative expense budget
Format and Example
The following example illustrates the format of cash budget. Company A maintains a minimum cash balance of $5,000. In case of a deficiency, loan is obtained at 8% annual interest rate on the first day of the period.
| Company A | |||||
| Cash Budget | |||||
| For the Year Ending December 30, 2010 | |||||
| Quarter | |||||
| 1 | 2 | 3 | 4 | Year | |
| Beginning Cash Balance | $5,200 | $5,000 | $5,000 | $11,740 | $5,200 |
| Add: Budgeted Cash Receipts: | 37,150 | 54,190 | 53,730 | 62,300 | 207,370 |
| Total Cash Available for Use | $42,350 | $59,190 | $58,730 | $74,040 | $212,570 |
| Less: Cash Disbursements | |||||
| Direct Material | 14,960 | 16,550 | 16,810 | 19,410 | 67,730 |
| Direct Labor | 8,830 | 9,610 | 9,750 | 11,900 | 40,090 |
| Factory Overhead | 10,020 | 10,400 | 11,000 | 11,780 | 43,200 |
| Selling and Admin. Expenses | 7,640 | 8,360 | 8,500 | 9,610 | 34,110 |
| Equipment Purchases | 6,000 | 14,000 | 20,000 | ||
| Total Disbursements | $41,450 | $50,920 | $46,060 | $66,700 | $205,130 |
| Cash Surplus/(Deficit) | $900 | $8,270 | $12,670 | $7,340 | $7,440 |
| Financing: | |||||
| Borrowing | 4,100 | 4,000 | |||
| Repayments | −3,188 | −912 | −4,000 | ||
| Interest | −82 | −18 | −100 | ||
| Net Cash from Financing | $4,100 | −$3,270 | −$930 | −100 | |
| Budgeted Ending Cash Balance | $5,000 | $5,000 | $11,740 | $7,340 | $7,340 |
by Irfanullah Jan, ACCA and last modified on