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CASH BUDGET
The cash budget is one of the most important elements of the budgeted balance sheet. The cash budget presents the expected receipts (inflows) and payments (outflows) of cash for a period of time. Information from the various operating budgets, such as the sales budget, the direct materials purchases budget, and the selling and administrative expenses budget, affects the cash budget. In addition, the capital expenditures budget, dividend policies, and plans for equity or long term debt financing also affect the cash budget. The following shows the monthly cash budget for January, February and March 2008, for the company Colt manufacturing, Inc.
Estimated Cash Receipts
Estimated cash receipts are planned additions to cash from sales and other resources, such as issuing securities or collecting interest. A supporting schedule can be used in determining the collections from sales. To illustrate this schedule, assume the following information:
Accounts receivable, January 1, 2000 ...................................................................... $270,000
January February March
Budgeted sales $1,080,000 $1,240,000 $970,000
The company Colt Manufacturing, Inc. expects to sell 10% of its merchandise for cash. Of the remaining 90% of the sales on account, 60% are expected to be collected in the month of the sale and the remainder in the next month. Using this information we prepare the schedule of collection of sales, shown in the following table. The cash receipts from sales on account are determined by adding the amounts collected from credit sales earned in the current period (60%) and the amounts accrued from sales in the previous period as accounts receivable.
|
Schedule of Collections from Sales For the Three Months Ending March 31, 2008 |
|||
|
. |
January | February |
March |
| Receipts
from cash sales: |
|
||
|
Cash sales (10% X current month's sales - Note
A) |
$108,000 |
$124,000 |
$97,000 |
|
|
|||
| Receipts
from sales on account: |
|||
|
Collections from prior month's sales (40% of previous month's credit
sales - Note B) |
$370,000 |
$388,800 |
$446,400 |
| Collections from current month's sales (60% of current month's credit sales - Note C) | 583,300 |
669,600 |
523,800 |
| Total
receipts
from sales on account |
$953,200 |
$1,058,400 |
$970,200 |
NOTE A:
$108,000 =
$1,080,000 X 10%
$124,000 = $1,240,000 X 10%
$97,000 = $970,000 X 10%
NOTE B: $370,000,
given as
January 1, 2008 Accounts Receivable balance.
$388,800 = $1,080,000 X 90% X 40%
$446,400 = $1,240,000 X 90% X 40%
NOTE C: $583,200
= $1,080,000
X 90% X 60%
$669,600 = $1,240,000 X 90% X 60%
$523,800 = $970,000 X 90% X 60%
Estimated
Cash Payments
Estimated cash payments are planned reductions in cash from
naufacturing costs, selling and administrative expenses, capital
expenditures, and other sources, such as buying securities or paying
interest or dividends. a supporting schedules can be used in estimating
the cash payments for manufacturing costs. Assume the following
information for the company Colt Manufacturing, Inc.:
January February March
Manufacturing costs $840,000 $780,000 $812,000
Depreciation expense on machines is estimated to be $24,000 per month and is included in the manufacturing costs. The accounts payable were incurred for manufacturing costs. The company expects to pay 75% of the manufacturing costs in the month in which they are incurred and the balance in the next month. Using this information, a schedule of payments has been prepared as shown in the next table:
|
Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2008 |
|||
| |
January |
February |
March |
| Payments
of prior month's manufacturing costs |
|
||
|
25% X previous month's manufacturing costs (less depreciation) - Note
A |
$190,000 |
$204,000 |
$189,000 |
|
. |
|
||
| Payments of current month's manufacturing costs | |||
| 75% X current month's manufacturing costs (less depreciation) - Note B | $612,000 |
$567,000 |
$591,000 |
| Total
payments |
$802,000 |
$771,000 |
$780,000 |
NOTE A: $190,000,
given as
January 1, 2008 Accounts Payable balance.
$204,000 = ($840,000 - $24,000) X 25%
$189,000 = ($780,000 -
$24,000) X 25%
$567,000 = ($780,000 - $24,000) X 75%
$591,000 = ($812,000 - $24,000) X 75%
Completing the Cash Budget
To complete the cash budget for the company Colt Manufacturing, Inc.,
assume that the following is expected by the company:
Cash balance on January 1
......................................................................
$280,000
Quarterly taxes paid on March 31
..........................................................
$150,000
Quarterly interest expense paid on January 10
.....................................
$22,500
Quarterly interest revenue received on march 21
..................................
$24,500
Sewing equipment purchased
...................................................................
$274,000
January February March
Selling and administrative expenses $160,000 $165,000 $145,000
We can compare the estimated cash balance at the end of the period with the minimum balance required by operations. Assuming that the minimum cash balance for Colt Manufacturing, Inc. is $340,000, we can determine any expected excess or deficiency.
The minimum cash balance protects against variations in estimates and for unexpected cash emergencies. For effective cash management, much of the minimum cash balance should be deposited in income-producing securities that can be readily converted to cash. U.S. Treasury Bills or Notes are examples of such securities.
The following table show the cash budget for the company Colt Manufacuring, Inc.:
|
Cash Budget For the Three Months Ending March 31, 2008 |
|||
| |
January | February |
March |
| Estimated
cash receipts from: |
|
||
|
Cash sales |
$108,000 |
$124,000 |
$97,000 |
|
|
|
||
|
Collections of accounts receivable |
953,200 |
1,058,400 |
970,200 |
|
Interest revenue |
|
|
$24,500 |
|
Total cash
receipts |
$1,061,200 |
$1,182,400 | $1,091,700 |
| Estimated
cash payments
for: |
|||
|
Manufacturing costs |
$802,000 |
$771,000 |
$780,000 |
|
Selling and administrative expenses |
160,000 |
165,000 |
145,000 |
|
Capital additions |
274,000 |
||
|
Interest expense |
22,500 |
||
|
Income taxes |
150,000 |
||
|
Total cash
payments |
$984,500 |
$1,210,000 |
$1,075,000 |
| Cash increase
(decrease) |
$76,700 |
($27,600) |
$16,700 |
| Cash balance
at beggining
of month |
280,000 |
356,700 |
329,100 |
| Cash
balance at end of month |
$356,700 |
$329,100 |
$345,800 |
| Minimum cash
balance |
340,000 |
340,000 |
340,000 |
| Total
payments |
($16,700) |
($10,900) |
$5,800 |
CAPITAL
EXPENDITURES BUDGET
The capital expenditures budget
summarizes plans for acquiring fixed assets. Such expenditures are
necessary as machinery and other fixed assets wear out, become
obsolete, or for other reasons need to be replaced. In addition,
expanding plant facilities may be necessary to meet increasing demand
for a company's product.
|
Capital Expenditures Budget For Five Years Ending December 31, 2008 |
|||||
| Item
|
2004 |
2005 |
2006 |
2007 |
2008 |
| Machinery
- Cutting Department |
$400,000 |
|
$280,000
|
$360,000 |
|
| Machinery - Sewing Department | 274,000 |
$260,000 |
$560,000 | 200,000 |
|
| Office
Equipment |
|
90,000 |
60,000 |
||
| Total
|
$674,000 |
$350,000 |
$560,000 | $480,000 | $420,000 |
BUDGETED
BALANCE SHEET