Cash budgeting

1. Cash budgeting

2. What is a budget? • An agreed plan of action for a period of time • A financial plan shown in monetary terms • Sets out financial targets for a business

3. Why use a budget? • To plan and allocate resources • To control income and expenditure • To forecast outcomes • To set targets • To motivate staff • To define levels of authority • To monitor performance against it

4. It is essential that a business prepares a cash budget for the financial period. The cash budget must show all the forecast cash inflows and cash outflows for the period. The cash budget will show whether the business expects to have a cash surplus or a cash shortage for the financial period.

5. Typical cash inflows • Cash sales • Payments from debtors • Proceeds from sale of fixed assets • Tax refunds • Rent received • Commission received

6. Typical cash outflows • Wages and salaries • Cash purchases • Payments to creditors • Purchase of fixed assets • Payment of rent • Payment of insurances • Cash drawings by the owner

7. Layout of a cash budget • Months • 1 2 3 • Balance at start 600 1000 1600 • Receipts • Cash sales 900 1200 1400 • Debtors 500 600 700 • 2000 2800 3700 • Payments • Creditors 400 500 800 • Wages 600 700 700 • 1000 1200 1500 • Balance at end 1000 1600 2200

8. Timing differences for sales and purchases Adjustments will have to be made for the timing differences between the payment of creditors and the receipts from debtors. In a real situation, a sale will be made but the money may not be received until the next month. A purchase of materials will take place but no payment may be required for two months. Cash received and cash paid must be recorded in the cash budget in the month it is received or paid.

9. Points to note At AS level, you should be able to: • Explain the purpose of budgeting • Evaluate the benefits of budgeting • Prepare a cash budget. You do not need to know how to apply discounts to sales and purchases.