Unit IV: MANAGEMENT OF CASH

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 Table of Contents
Cash Management:- ................................................................................................................... 3

Motives for Holding Cash...................................................................................................... 3

Objectives of Cash Management ........................................................................................... 4

Advantages of Adequate Cash ............................................................................................... 5

Conclusion ............................................................................................................................. 6

Cash Budget as a tool of cash Management .......................................................................... 6

Cash Budget Numericals............................................................................................................ 8

Problem 1 ............................................................................................................................... 8

Problem 2 ............................................................................................................................... 9

Problem 3 ............................................................................................................................. 11

Problem 4 ............................................................................................................................. 12

Problem 5 ............................................................................................................................. 13

Problem 6 ............................................................................................................................. 14

Problem 7 ............................................................................................................................. 15

Problem 8 ............................................................................................................................. 15

Problem 9 ............................................................................................................................. 17

Problem 10 ........................................................................................................................... 18

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Cash Management:-
 Is the maintaining of liquidity of a firm to minimize the risk of insolvency?
 An insolvent company is one where it is unable to meet its maturing liabilities on time
because it has inadequate liquidity to meet its debt obligation.
 Cash Management is also about the proper balancing of keeping cash without letting it
idling around.
 Remember that profit is not equating to cash flow. A highly profitable company might
collapse if without adequate cash flow due to the tying up of company’s funds with the
accounts receivable and worsen by the needs to make regular payments like wages, rent
& utilities, taxes

Motives for Holding Cash

There are three (3) motives for holding cash as advocated by British economist, John
Maynard Keynes, they are:
1. Transactionary motive
2. Precautionary motive and
3. Speculative motive

1. Transactionary Motive:
Requirement of cash to meet day to day needs is known as transaction motive. For example:
On day to day basis the company is required to make regular payments like purchases,
salaries/wages, taxes, interest, dividends etc. for which company will hold the cash.
Similarly, company receives cash from its sale operations. However, sometimes receipts of
the cash and the cash payments do not match with each other; in such situations the company
should have enough cash to honour the commitments whenever they are due. So transaction
motive is all about:
 Maintaining cash for the purpose of meeting cash needs arising in the ordinary course of
doing business.
 Includes regular payments like wages, utilities, acquisition of fixed assets and inventories
 Note that the amount of cash needed for transaction requirements depends on the nature
of business and varies from industry to industry.

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2. Precautionary motive:
Holding up of cash balance in order to take care of contingencies and unforeseen
circumstances is known as precautionary motive. In addition to requirement of cash for
regular transactions, the company may require the cash for such purposes which cannot be
estimated or foreseen.
 For example: Sudden decline in the collection from the customers or sharp increase in the
prices of raw materials may put the company in such a situation where they need
additional funds to deal with such situation without affecting its regular business.
So it deals with maintaining of cash balance as buffer for unexpected needs that may arise.
Either holding in cash or marketable securities that can be liquidated easily

3. Speculative motive:
Holding up of some reserve in the form of cash to take the benefit of some specific nature of
favourable market conditions is known speculative motive.
For example:
 If the company presumes that in near future prices of raw material is going to be low, then
it will preserve that cash for future purchase of raw material.
 In another case if interest rates are expected to increase then the company will purchase
securities from the reserved cash.
 Holding cash for potential profit making situation like purchasing raw materials in bulk in
anticipation of a fall in price

Objectives of Cash Management

Cash management is a broad term that refers to the collection, concentration, and
disbursement of cash. It encompasses a company's level of liquidity, its management of cash
balance, and its short-term investment strategies. In some ways, managing cash flow is the
most important job of business managers. If at any time a company fails to pay an obligation
when it is due because of the lack of cash, the company is insolvent. Insolvency is the
primary reason firms go bankrupt. Obviously, the prospect of such a dire consequence should
compel companies to manage their cash with care. Moreover, efficient cash management
means more than just preventing bankruptcy. It improves the profitability and reduces the risk
to which the firm is exposed.

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Advantages of Adequate Cash

 To prevent firm from being insolvent.

 The relation of firm with bank does not deteriorate.
 Contingencies can be met easily.
 It helps firm to maintain good relations with suppliers.
 To minimise Cash Balance
 Excessive amount of cash balance helps in quicker payments, but excessive cash may
remain unused & reduces profitability of business.
 Contrarily, when cash available with firm is less, firm is unable to pay its liabilities in
time. Therefore optimum level of cash should be maintained.
 Meeting payments schedule: In the normal course of functioning, a firm has to make
various payments by cash to its employees, suppliers and infrastructure bills. Firms will
also receive cash through sales of its products and collection of receivables. Both of these
do not occur simultaneously. The basic objective of cash management is therefore to meet
the payment schedule on time.
 Timely payments will help the firm to maintain its creditworthiness in the market and to
foster cordial relationships with creditors and suppliers.
 Creditors give cash discount if payments are made in time and the firm can avail this
discount as well.
 Trade credit does not involve explicit interest charges, but there is an implicit cost
involved. If the credit term is for example, 2/10, net 30; it means the company will get a
cash discount of 2% for a payment made within 10 days, or else the entire payment is to
be made within 30 days. Since the net amount is due within 30 days, not availing discount
means paying an extra 2% for the 20-day period.
 The other advantage of meeting the payments on time is that it prevents bankruptcy that
arises out of the firm’s inability to honour its commitments.
 Minimising funds held in the form of cash balances: Trying to achieve this objective is
very difficult. A high level of cash balance will help the firm to meet its first objective,
but keeping excess reserves is also not desirable as funds in its original form is idle cash
and a non-earning asset. It is not profitable for firms to maintain huge balances. Seasonal
industries are classic examples of mismatches between inflows and outflows. The
efficiency of cash management can be augmented by controlling a few important factors:

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 Prompt billing and mailing: There is a time lag between the dispatch of goods and
preparation of invoice. Reduction of this gap will bring in early remittances.
 Collection of cheques and remittances of cash: Generally, we find a delay in the receipt of
cheques and their deposits in banks. The delay can be reduced by speeding up the process
of collecting and depositing cash or other instruments from customers.
 Float: The concept of ‘float’ helps firms to a certain extent in cash management. Float
arises because of the practice of banks not crediting the firm’s account in its books when
a cheque is deposited by it and not debiting the firm’s account in its books when a cheque
is issued by it, until the cheque is cleared and cash is realised or paid respectively.
Whenever cheques are deposited in the bank, credit balance increases in the firm’s books
but not in bank’s books until the cheque is cleared and money is realised. This refers to
‘collection float’, that is, the amount of cheques deposited into a bank and clearance
awaited. Likewise the firm may take benefit of ‘payment float’.
o Net Float = Payment Float – Collection Float

Conclusion
In order to ensure you meet the objectives of an effective cash management policy, the
financial manager must ensure that the company meets the payment schedule and also
minimize idle funds committed to cash balances.
Cash is one of the most important aspects of a business. Lack of cash could and would
probably lead to financial problems hence it is vital for a company to have a financial
manager who is responsible for managing its cash to ensure it has enough to pay off creditors
whilst also making profit from possible investment schemes with its idle cash.

Cash Budget as a tool of cash Management

A cash budget is a budget or plan of expected cash receipts and disbursements during the
period. These cash inflows and outflows include revenues collected, expenses paid, and loans
receipts and payments. In other words, a cash budget is an estimated projection of the
company's cash position in the future.

Cash budget is an estimation of the cash inflows and outflows for a business or individual for
a specific period of time. Cash budgets are often used to assess whether the entity has

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sufficient cash to fulfill regular operations and/or whether too much cash is being left in
unproductive capacities. Cash budget is extremely important, especially for small businesses,
because it allows a company to determine how much credit it can extend to customers before
it begins to have liquidity problems.

For individuals, creating a cash budget is a good method for determining where their cash is
regularly being spent. This awareness can be beneficial because knowing the value of certain
expenditures can yield opportunities for additional savings by cutting unnecessary costs. For
example, without setting a cash budget, spending a dollar a day on a cup of coffee seems
fairly unimpressive. However, upon setting a cash budget to account for regular annual cash
expenditures, this seemingly small daily expenditure comes out to an annual total of $365,
which may be better spent on other things. If you frequently visit specialty coffee shops, your
annual expenditure will be substantially more.

A cash budget is a budget or plan of expected cash receipts and disbursements during the
period. These cash inflows and outflows include revenues collected, expenses paid, and loans
receipts and payments. In other words, a cash budget is an estimated projection of the
company's cash position in the future. Management usually develops the cash budget after the
sales, purchases, and capital expenditures budgets are already made. These budgets need to
be made before the cash budget in order to accurately estimate how cash will be affected
during the period. For example, management needs to know a sales estimate before it can
predict how much cash will be collected during the period.

Management uses the cash budget to manage the cash flows of a company. In other words,
management must make sure the company has enough cash to pay its bills when they come
due. For instance, payroll must be paid every two weeks and utilities must be paid every
month. The cash budget allows management to predict short falls in the company's cash
balance and correct the problems before payments are due. Likewise, the cash budget allows
management to forecast large amounts of cash. Having large amounts of cash sitting idle in
bank accounts is not ideal for companies. At the very least, this money should be invested to
earn a reasonable amount of interest. In most cases, excess cash is better used to expand and
develop new operations than sit idle in company accounts. The cash budget allows
management to predict cash levels and adjust them as needed.

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Cash Budget Numericals
Problem 1
From the following forecasts of income and expenditure, prepare a cash budget for the
months Jan. to April 2011.
Months Sales Purchase Wages Manufacturing Administrative Selling
(Credit) (Credit) Expenses Expenses Expenses
2010 30,000 15,000 3000 1150 1060 500
Nov.
Dec. 35,000 20,000 3200 1225 1040 550

2011 25,000 15,000 2500 990 1100 600

Jan.
Feb. 30,000 20,000 3000 1050 1150 620

March 35,000 22,500 2400 1100 1220 570

April 40,000 25,000 2600 1200 1180 710

Additional information is as follows:

1) The customers are allowed a credit period of two months.

2) A dividend of ₹10,000 is payable in April.
3) Capital expenditure which has to be incurred: 15th Jan. ₹5000, we will buy a plant, and in
March, we will buy a building on loan and its payment will be done within monthly
instalments of ₹2000 each.
4) The creditors are allowing a credit of 2 months.
5) Wages are paid on the 1st of the each month.
6) Lag in payment of other expenses is one month.
7) Balance of cash in hand on 1st Jan. 2011 is ₹15,000.

Solution
Final Answer
Jan Closing balance 18,985
Feb Closing Balance 28,795
March Closing Balance 30,975
April Closing Balance 23,685

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Problem 2

Saurashtra Co. Ltd. wishes to arrange overdraft facilities with its bankers from the period
August to October 2010 when it will be manufacturing mostly for stock. Prepare a cash
budget for the above period from the following data given below:
Month Sales ₹ Purchases ₹ Wages ₹ Mfg. Office Selling
Exp. ₹ Exp.₹ Exp.₹
June 180,000 124,800 12,000 3000 2,000 2000
July 192,000 144,000 14,000 4000 1,000 4,000
August 108,000 243,000 11,000 3000 1,500 2,000
September 174,000 246,000 12,000 4500 2,000 5,000
October 126,000 268,000 15,000 5000 2,500 4,000
November 140,000 280,000 17,000 5500 3,000 4,500
December 160,000 300,000 18,000 6000 3,000 5,000

Additional Information:
1) Cash on hand 1‐08‐2010 ₹25,000.
2) 50% of credit sales are realized in the month following the sale and the remaining 50% in
the second month following. Creditors are paid in the month following the month of
purchase.
3) Lag in payment of manufacturing expenses half month.
4) Lag in payment of other expenses one month.

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Solution
Cash Budget for 3 months from August to October 2010
Particulars August ₹ September ₹ October ₹
Receipts:
Opening balance 25,000 44,500 (66,750)
Sales 186,000 150,000 141,000
(A) Total Receipts 211,000 194,500 74,250
Payments:
Purchases 144,000 243,000 246,000
Wages 14,000 11,000 12,000
Mfg. Exp. 3500 3750 4750
Office Exp. 1000 1500 2000
Selling Exp. 4000 2000 5000
(B) Total payments 166,500 261,250 269,750
(C) Closing Balance (A-B) 44,500 (66,750) (195,500)

Working Note:
1. Manufacturing Expenses
Particular August September October
July (4000/2) 2000 --- ---
August (3000/2) 1500 1500 ---
September (4500/2) --- 2250 2250
October (5000/2) --- --- 2500
Total 3500 3750 4750

2. Sales
Particular August September October
June (180,000/2) 90,000 -- --
July (192,000/2) 96,000 96,000 --
Au1ust (108,000/2) -- 54,000 54,000
September (174,000/2) -- -- 87,000
Total 186,000 150,000 141,000

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Problem 3

S. K. Brothers wish to approach the bankers for temporary overdraft facility for the period
from October 2010 to December 2010. During the period of this period of these three months,
the firm will be manufacturing mostly for stock. You are required to prepare a cash budget
for the above period.

Month Sales ₹ Purchases ₹ Wages ₹

August 360,000 249,600 24,000
September 384,000 288,000 28,000
October 216,000 486,000 22,000
November 348,000 492,000 20,000
December 252,000 536,000 30,000

1. 50% of credit sales are realized in the month following the sales and remaining 50% in
the second following.
2. Creditors are paid in the month following the month of purchase
3. Estimated cash as on 1‐10‐2010 is ₹50,000.

Solution
Particulars October ₹ November ₹ December ₹
Receipts:
Opening balance 50,000 112,000 (94,000)
Collection from Debtors 372,000 300,000 282,000
(A) Total Receipts 422,000 412,000 188,000
Payments:
Payments to Creditors 288,000 486,000 492,000
Wages 22,000 20,000 30,000
(B) Total payments 310,000 506,000 522,000
Closing Balance (A-B) 112,000 (94,000) (334,000)

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Working Note: Collection from debtors

Sales October ₹ November ₹ December ₹

August 1,80,000 192,000 -
September 192,000
October 108,000 108,000
November 174,000
372,000 300,000 282,000

Problem 4

 TATA Co. Ltd. is to start production on 1st January 2011.

 The prime cost of a unit is expected to be ₹40 (₹16 per materials and ₹24 for labour).
 In addition, variable expenses per unit are expected to be ₹8 and fixed expenses per
month ₹30,000.
 Payment for materials is to be made in the month following the purchase. One‐third of
sales will be for cash and the rest on credit for settlement in the following month.
Expenses are payable in the month in which they are incurred.
 The selling price is fixed at ₹80 per unit. The number of units to be produced and sold is
expected to be as follows: January 900; February 1200; March 1800; April 2000; May
2,100 June 2400.
Draw a Cash Budget indicating cash requirements from month to month.

Solution
Cash Budget

Month Jan. Feb. March April May June

Receipts
Opening Bal. 24,000 (34,800) (37,600) (32,400) (5,867) (27,600)
Cash sales 32,000 48,000 53,333 56,000 64,000
Debtors 48,000 64,000 96,000 1,06,667 1,12,000
Total
24,000 45,200 74,400 1,16,933 1,56,800 1,48,400
receipts(A)

Payments
Creditors 21,600 14,400 19,200 288,00 32,000 33,600
Wages 28,800 43,200 48,000 50,400 57,600
Variable Exp. 7,200 9,600 14,400 16,000 16,800 19,200

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 Fixed Exp. 30,000 30,000 30,000 30,000 30,000 30,000
Total
58,800 82,800 1,06,800 1,22,800 1,29,200 1,40,400
Payment(B)
Closing
-34,800 -37600 -32400 -5867 -27,600 8,000
Balance

Problem 5
Prepare a Cash Budget of R.M.C. Ltd. for April, May and June 2012:

Months Sales ₹ Purchases ₹ Wages ₹ Expenses ₹

Jan. (Actual) 80,000 45,000 20,000 5,000
Feb. (Actual) 80,000 40,000 18,000 6,000
March (Actual) 75,000 42,000 22,000 6,000
April (Budget) 90,000 50,000 24,000 7,000
May (Budget) 85,000 45,000 20,000 6,000
June (Budget) 80,000 35,000 18,000 5,000

Additional Information:
i. 10% of the purchases and 20% of sales are for cash.
ii. The average collection period of the company is ½ month and the credit purchases are
paid regularly after one month.
iii. Wages are paid half monthly and the rent of ₹500 included in expenses is paid monthly
and other expenses are paid after one month lag.
iv. Cash balance on April 1, 2012 may be assumed to be ₹15,000

Solution

Cash Budget (For the months ending April, May & June 2012)

Particulars April ₹ May₹ June₹

Receipts
Opening Balance 15,000 27,200 35,700
Cash Sales 18,000 17,000 16,000
Debtors 66,000 70,000 66,000
(A) Total Receipts 99,000 114,200 117,700

Payments

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Cash Purchases 5,000 4,500 3,500
Creditors 37,800 45,000 40,500
Wages 23,000 22,000 19,000
Rent 500 500 500
Other Exp. 5,500 6,500 5,500
(B) Total Payments 71,800 78,500 69,000
Closing balance 27,200 35,700 48,700

Problem 6

From the following information prepare cash budget for MNO limited:
Particulars Jan ₹ Feb ₹ Mar ₹ Apr ₹
Opening cash balance 20,000 - - -
Collection from customers 130,000 140,000 160,000 230,000
Payments:
Raw material purchases 25,000 45,000 40,000 63,200
Salary and wages 100,000 105,000 100,000 114,200
Other expenses 15,000 10,000 15,000 12,000
Income tax 6000 - - -
Machinery - - 20,000 -
The firm wants to maintain a minimum cash balance of ₹30,000 for each month. Ignore
interest. Creditors are allowed one month credit. There is no lag in payment of salary and
other expenses.

Solution
Particulars JAN ₹ FEB ₹ MAR ₹ APR ₹
(A) Cash Inflows
1 Opening Cash Bal 20,000 30,000 30,000 30,000
2 Coll. from customers 130,000 140,000 160,000 230,000
Total CIF 150,000 170,000 190,000 260,000
(B) Cash Outflows
1 RM Payments 0 25,000 45,000 40,000
2 Salary & Wages 100,000 105,000 100,000 114,200
3 Other Exp. 15,000 10,000 15,000 12,000
4 Income Tax 6,000 0 0 0
5 Machine Purchase 0 0 20,000 0
Total COF 121,000 140,000 180,000 166,200
(C) Cash Bal = CIF - COF 29,000 30,000 10,000 93,800
Add: Borrowings 1,000 0 20,000 0
(D) Closing Cash Balance 30,000 30,000 30,000 93,800

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Problem 7

Prepare cash budget for 3 months ending 30-06-2012 from the following information given:
Month Sales ₹ Material ₹ Wages ₹ Overheads ₹
Feb 14,000 9600 3000 1700
March 15,000 9000 3000 1900
April 16,000 9200 3600 2000
May 17,000 10,000 3200 2200
June 18,000 10,400 6000 2300

a) Credit terms: 10% cash sales; 50% of the credit sales are collected next month and the
balance in the following month.
b) Suppliers enjoy a 2 month lag, Wages ¼ month; overheads ½ month.
c) Cash and bank balance as on 1st April 2012 is expected to be ₹6000
d) Minor Machine Part will be installed in February 2012 at a cost of ₹96,000. The
monthly instalment of ₹2000 for the same is payable from April onwards.
e) Dividend at 5% on preference share capital of ₹20,000 will be payable in May as well
as in June.
f) Advance to be received for sale of vehicles ₹9000 in June.
g) Dividends from investments amounting to ₹1000 are expected to be received in June.
h) Income tax (advance) to be paid in June is ₹2000
Solution
Particulars APR ₹ MAY ₹ JUN ₹
(A) Cash Inflows
1 Opening cash balance 6,000 3,650 1,900
2 Cash Sales 10% 1,600 1,700 1,800
3 Cr. Sales coll. next month 6,750 7,200 7,650
4 Cr. Sales coll. in month after that 6,300 6,750 7,200
5 Adv. Received 9,000
6 Dividend Received 1,000
Total CIF 20,650 19,300 28,550
(B) Cash Outflows
1 RM Payments 9,600 9,000 9,200
2 Wages Paid 2,700 2,400 4,500
3 Wages Outstanding 750 900 800
4 O/H Paid 1,000 1,100 1,150
5 O/h Outstanding 950 1,000 1,100
6 Machine EMI 2,000 2,000 2,000
7 Dividend Paid 1,000 1,000
8 Income Tax paid 2,000
Total COF 17,000 17,400 21,750
(C) Cash Bal = CIF - COF 3,650 1,900 6,800
Problem 8

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1. Prepare a worksheet showing the anticipated cash flows for STU limited if the following
information is available:
a) The firm sells some goods on credit and allows a cash discount for payments made
within 20 days. The experience has been that on 20% of sales, payment is made
during the month in which the sale is made; on 70% of the sales payment is made
during the next month after the sale and on 10% of sales payment is made during the
third month.
b) The raw materials and other supplies required for production amount to 70% of sales
and are bought in the month before the firm expects to sell its finished products.
c) The firm’s purchase terms allows for a delayed payment on its purchases by one
month.
d) The credit sales of the firm are:- (in ₹ Lakhs)
May 2021 10 August 30 November 20
June 10 September 40 December 10
July 20 October 20 January 2022 10

Solution
(Figures in ₹ Lakhs)
Particulars May Jun Jul Aug Sep Oct Nov Dec Jan
A Cash Inflows
1 Coll. in same month 2 2 4 6 8 4 4 2 2
2 Coll. in 1st month after sale 0 7 7 14 21 28 14 14 7
3 Coll. in 2nd month after sale 0 0 1 1 2 3 4 2 2
Total CIF 2 9 12 21 31 35 22 18 11

B Cash Outflows
1 RM Payments 7 7 14 21 28 14 14 7 7
Total COF 7 7 14 21 28 14 14 7 7
C Cash Bal = CIF - COF (5) 2 (2) 0 3 21 8 11 4

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Problem 9

The following information is available in respect of XYZ limited.

Table A: Balance Sheet as on March 31st
Liabilities Amount Assets Amount
Accrued Salaries 500 Cash 3000
Other Liabilities 2500 Inventory 8000
Capital 65,000 Other Assets 70,000
Less: Depreciation (13,000) 57,000
68,000 68,000

Table B: Sales Forecast

Month Amount Month Amount
April 10,000 July 50,000
May 20,000 August 40,000
June 30,000 September 20,000
October 5,000

Table C: Salary Expense Budget

Month Amount Month Amount
April 15,00 July 4,000
May 2,000 August 3,000
June 25,00 September 2,000

Additional Information:
a) Other expenses approximate 12% of sales (paid in the same month)
b) Sales will be 80% cash and 20% credit. All credit sales will be collected in the following
month and no bad debts are expected.
c) All inventory purchases will be paid for during the month in which they are made.
d) A minimum cash balance of ₹3000 will be maintained.
e) New orders for equipment amounting to ₹20,000 scheduled for May 1 delivery and
₹10,000 for June 1 delivery have been made. Payment will be made at the time of
delivery.
f) Accrued salaries and other liabilities will remain unchanged.
g) Gross profit margin is 40% of sales.
h) Prepare a cash budget for 6 months: April - September. Borrowings are made in
thousands of Rupees. Ignore interest.

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Solution
(Figures in ₹)
Particulars Apr May Jun Jul Aug Sep
(A) Cash Inflows
1 Opening cash balance 3,000 3,300 3,900 3,800 9,800 20,000
2 Cash Sales: 80% 8,000 16,000 24,000 40,000 32,000 16,000
3 Cr. Sales: 20% 0 2,000 4,000 6,000 10,000 8,000
Total CIF 11,000 21,300 31,900 49,800 51,800 44,000
(B) Cash Outflows
1 Other Exp. 12% 1,200 2,400 3,600 6,000 4,800 2,400
2 RM Payments: 60% 6,000 12,000 18,000 30,000 24,000 12,000
3 Payments for Equipment 20,000 10,000
4 Salary Payments 1,500 2,000 2,500 4,000 3,000 2,000
Total COF 8,700 36,400 34,100 40,000 31,800 16,400
(C) Cash Bal = CIF - COF 2,300 (15,100) (2,200) 9,800 20,000 27,600
Borrowings 1,000 19,000 6,000 0 0 0
(D) Closing Cash Balance 3,300 3,900 3,800 9,800 20,000 27,600

Problem 10

Prepare monthly cash forecast for the XYZ Ltd. for the quarter ending 31st March, from the
following details:
a) Opening balance as on 1st January is ₹22,000.
b) Its estimated sale for the month of January and February ₹100,000 each and for the month
of March is ₹120,000. The sale for November and December of the previous year have
been ₹100,000 each.
c) Cash and credit sales are estimated 20% and 80% respectively.
d) The receivables from credit are expected to be collected as follows: 50% of the receivable
on an average of one month from the date of sales; and balance 50% after two months
from the date of sale. No bad debts on the realization of sales.
e) Other anticipated receipts is ₹5,000 from the sale of machine in March.

The forecast of payment is as follows:

a) The purchase of materials worth ₹40,000 in January and February and materials worth
₹48,000 in March.
b) The payments for these purchase are made approximately a month after the purchase. The
purchases for December of the previous year have been ₹40,000 for which the payment
will be made in January.

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 c) Miscellaneous cash purchase of ₹2000 per month.
d) The wages payments are expected to be ₹15,000 per month.
e) Manufacturing expenses are expected to be ₹20,000 per month.
f) General selling expenses are expected to be ₹10,000 per month.
g) A machine worth ₹50,000 is proposed to be purchased on cash in March.

Solution
Cash Budget for the period January –March
(Figures in ₹)
Particulars January February March
Opening Cash 22,000 35,000 48,000
Cash Inflows:
Cash sales 20,000 20,000 24,000
Debtors collected 80,000 80,000 80,000
Sale of machine - - 5,000
(A) Total Cash 122,000 135,000 157,000
Cash Outflows:
Cash Purchases 2,000 2,000 2,000
Payment to creditors 40,000 40,000 40,000
Wages 15,000 15,000 15,000
Manufacturing expenses 20,000 20,000 20,000
General selling expenses 10,000 10,000 10,000
Purchase of machine -- -- 50,000
(B) Total Outflows 87,000 87,000 137,000
Cash balance (A – B) 335,000 48,000 20,000

Working Notes
Collection from Debtors
Particulars January February March
Sales 1,00,000 1,00,000 1,20,000
Cash 20% 20,000 20,000 24,000
Credit 80,000 80,000 96,000
50% with one month credit 40,000 40,000 40,000
50% with 2 month Credit 40,000 40,000 40,000
Total Collection 80,000 80,000 80,000

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