Assignment of Management of working

capital

Topic : Cash budget

SUBMITTED TO:

Dr.kamalpreet kaur (HOD) SUBMITTED BY:

Davinder SINGH

MBA 2nd

ROLL NO: 196212

Cash
In economics, cash is money in the physical form of currency, such as banknotes and coins.
In bookkeeping and finance, cash is current assets comprising currency or currency
equivalents that can be accessed immediately or near-immediately (as in the case of money
market accounts). Cash is seen either as a reserve for payments, in case of a structural or
incidental negative cash flow or as a way to avoid a downturn on financial markets.

Cash management

Cash management is the process of collecting and managing cash flows. Cash management
can be important for both individuals and companies. In business, it is a key component of
a company's financial stability. For individuals, cash is also essential for financial stability
while also usually considered as part of a total wealth portfolio.

Cash budget

Cash budget is a written estimate of a firm’s future cash position. It predicts for some future
period the cash receipts from different sources, cash disbursements for different purposes and
the resulting cash position generally on a monthly basis as the budget period develops. It is,
thus, a formal presentation of-expected circular flow of cash through the business.

The usual forecast period of a cash budget is one year broken down by monthly periods or
weekly periods. This allows incorporation of seasonal variations in cash flow. When cash
flows are relatively stable, the finance manager may prepare budget for full one year period.
When the outlook is very uncertain, he may have to be satisfied with a projection for only
quarterly.
 Objectives of Preparing Cash Budget
The objective of preparing cash budget is to enable the management to meet its cash
obligations as and when they fall due and to keep idle cash to a minimum level. If at any time
cash is much in excess of requirements, this means the firm is holding a sterile asset. Shortfall
of cash may at times prove suicidal. It should also be clearly understood that the liquidity
provided by cash holding is at the cost of profits which would otherwise have been earned by
investing cash elsewhere.

Utility of Cash Budget

1. It indicates the effect on the cash position of seasonal requirements, large inventories,
unusual receipts and slowness in collecting bills receivable.

2. It indicates cash requirements for a plant or equipment expansion programme.

3. It points to the need for additional funds from external sources such as bank loans. issue of
securities.

4. It indicates the availability of cash for taking advantage of discounts offered.

5. It helps in planning redemption of preference shares or redeemable debentures, payments

of pension etc.
6. It shows the availability of excess funds for short or long term investments.

HOW TO CREATE A CASH BUDGET 

There are three main components necessary for creating a cash budget. They are:

 Time period
 Desired cash position
 Estimated sales and expenses
Time Period ; The first decision to make when preparing a cash budget is to decide the
period of time for which your budget will apply. That is, are you preparing a budget for the
next three months, six months, twelve months or some other period? In this Business Builder,
we will be preparing a 3-month budget. However, the instructions given are applicable to any
time period you might select.

Cash Position ; The amount of cash you wish to keep on hand will depend on the nature of
your business, the predictability of accounts receivable and the probability of fast-happening
opportunities (or unfortunate occurrences) that may require you to have a significant reserve
of cash.

You may want to consider your cash reserve in terms of a certain number of days' sales. Your
budgeting process will help you to determine if, at the end of the period, you have an
adequate cash reserve.

Estimated Sales and Expenses ; The fundamental concept of a cash budget is estimating all
future cash receipts and cash expenditures that will take place during the time period. The
most important estimate you will make, however, is an estimate of sales. Once this is
decided, the rest of the cash budget can fall into place.

If an increase in sales of, for example, 10 percent, is desired and expected, various other
accounts must be adjusted in your budget. Raw materials, inventory and the costs of goods
sold must be revised to reflect the increase in sales. In addition, you must ask yourself if any
additions need to be made to selling or general and administrative expenses, or can the
increased sales be handled by current excess capacity? Also, how will the increase in sales
affect payroll and overtime expenditures?

Instead of increasing every expense item by 10 percent, serious consideration needs to be

given to certain economies of scale that might develop. In other words, perhaps, a supplier
offers a discount if you increase the quantities in which you buy a certain item or, perhaps,
the increase in sales can be easily accommodated by the current sales force; all of these types
of considerations must be taken into account before you start budgeting. Each type of
expense (as shown on your income statement) must be evaluated for its potential to increase
or decrease. Your estimates should be based on your experience running your business and
 on your goals for your business over the time frame for which the budget is being created. At
a minimum, the following categories of expected cash receipts and expected cash payments
should be considered:

 Cash balance:
 Expected cash receipts
 Cash sales
 Collections of accounts receivable
 Other income
 Expected cash expenses:
 Raw material (inventory)
 Payroll
 Other direct expenses:
 Advertising
 Selling expenses
 Administrative expense
 Plant and equipment expenditures
 Other payments

Following is a description of each line item:

Cash balance. The cash balance is your cash on hand. This includes what is in your checking
accounts, savings accounts, petty cash and any other cash accounts that you might have.

Cash Sales.  After arriving at a base figure of cash sales, it must be adjusted for any trade or
other discounts and for possible returns. As stated previously, the base level of sales (and of
accounts receivable) will be determined by the company's projections, goals and past
experience.

Collections of accounts receivable. After a base level of accounts receivable is established

(based on sales projections), it must be adjusted to reflect the amount that will actually be
paid during the time period. Typical adjustments for a small business might be to assume that
90 percent of accounts receivable will be collected in the quarter in which the sales occur, 9
 percent will be collected in the following quarter, and 1 percent will remain uncollectible. Of
course, past experience will be the most reliable indicator for making these adjustments.

Other Income. Your cash position may be affected positively by income other than that
received from sales. Perhaps there are investments, dividends, or an expected borrowing that
will be introducing cash to the company during the time period. These types of cash sources
are referred to as "other income."

Expected cash expenses:

 Raw materials (inventory). For small business retailers and manufacturers, the

largest cash expense is usually the amount spent for inventory or raw materials. Again, past
experience will be your best indicator of future cash outlays. But don't forget to factor in any
necessary increases to keep up with projected sales. You may also want to consult with your
suppliers as to whether any pricing changes are expected.
 Payroll. Salaries are commonly the second largest expense item during an accounting
period. Don't forget to include estimates for all appropriate local, state, and federal taxes.
 Other direct expenses. Use this line item for any additional expense that does not fit
conveniently under the other headings. If you are making payments on a loan, include it here.
 Advertising. The role of advertising varies by type of business. If you are projecting
an increase in sales, is there an accompanying marketing or advertising campaign? These
costs must be budgeted. Include any expenses for print (brochures, mailers, and newspaper
ads), radio, or other advertising services.
 Selling expenses. Typical selling expenses include salaries and commissions for sales
personnel and sales office expenses. However, this line item can also include any travel or
other sales-related expense not covered elsewhere.
 Administrative expenses. General office expenses are included here. This will
include your utilities, telephone, copying and day-to-day office expenses. Unless big changes
are underway, past experience will guide you in evaluating future administrative expenses.
 Plant and equipment. Cash payments for equipment loans, mortgages, repairs, or
other upkeep should be included here. Past experience will, again, be your guide.
 Other payments. If there are any cash payments you expect to make that are not
covered in the above listing, include them here. (If they are repeatable, you may consider
adding a separate line item.) However, typically, interest payments and taxes fall here
Cash Budget Format with Solved Example

Cash Budget
For the period ending………..
The directors of Kingston & Co. were concerned about the the company’s cash flow. They
requested their accountant to prepare a cash budget for the four months ending 30 April 2016.

(i) The following sales figures are for the months of November 2015 to June 2016. The
figures from January 2016 onward are estimated:

Half the sales are normally paid for in the month in which they occur and the customers are
rewarded with a 5% cash discount. The remaining sales are paid for net in the month
following the sale.

(ii) Goods are sold at a mark-up of 25% on the goods purchased one month before sale. Half
of the purchases are paid for in the month of purchase and a 4% prompt settlement discount is
received. The remainder is paid in full in the following month.

(iii) Wages of $12000 per month are paid in the month in which they are earned. It is
expected that the wages will be increased by 10% from 1 March 2016.

(iv) Rent will cost $60000 per annum payable three monthly in advance in January, April,
July and December each year.

(v) The directors have arranged a bank loan of $60000 which would be credited to company’s
current account in February 2016.
(vi) The half-yearly interest on 200000, 8% debentures of $1 each is due to be paid on 15
January 2016.

(vii) The ordinary dividend of $12000 for the year 2015 will be paid in March 2016.

(viii) The bank balance at 31 December 2015 is $12000.

Required:
Prepare a cash budget for the four months ended 30 April 2016. Give your answers to the
nearest dollar ($).

Cash Budget
For the four months ending 30 April 2016 
 HOW TO ANALYZE A CASH BUDGET

The preparation of a cash budget is only the first step toward good financial management.
The next step is to analyze to see how close the company is performing to expectations. Have
any unexpected cash outflows occurred? If so, is the company's financial position seriously
affected?

A simple method for monitoring the cash budget is to prepare a budget-versus-actual report
of actual and budgeted expenses every month. This type of report consists of three columns.
The first column shows the budgeted amounts, the second column shows actual company
performance, and the third column shows the difference in terms of a percent.

CONCLUSION

This Business Builder focuses on the creation of a cash budget for your business. While there
are several other types of budgets that can be prepared, small business owners should pay
close attention to their cash position and create a cash budget for their company. Preparing a
monthly budget vs. actual report will give small business owners the information they need to
make important decisions about the cash position of their company.