Cash Budgeting

MGMT 206
Introduction
• A cash budget provides detailed information
regarding the company’s expected cash
receipts and disbursements over a given
period. The cash budget allows management to
identify the periods when financing
requirements may be needed or when cash is
in excess.
Why prepare cash budget?
1. For planning purposes – helps management
in identifying the periods where there are
temporary financing gaps; source of cash
receipts are identified, as well as seasonality
of cash inflows; details of cash expenditures
are also indicated; allows management to
determine the scheduling of postponable
cash outflows.
Why prepare cash budget?
2. For control purposes – helps in monitoring
the operating efficiency of firms such as their
collection and selling efforts, as well as their
expenditures for operations
Components of cash budget
1. Cash receipts
2. Cash disbursements
3. Target cash balance
4. Cumulative excess cash or cash requirements
Cash receipts
A firm’s cash receipts may come from the
following:
1. Cash sales
2. Collection of accounts receivables
3. Loan proceeds
4. Sale of share of stocks, and
5. Sale of long-term assets
Cash receipts
The credit policy of the firm (credit terms and
discounts given during the discount period)
affect the timing of collection of accounts
receivables. The credit policy may be changed by
management to generate more cash. The
management must be aware of the possible
impact of changing the credit policy on its sales
and profitability.
Cash receipts
Example:
A firm may shorten its credit period from 60 days
to 30 days to increase cash receipts, or it may
grant more discounts for early payments by
customers.
Cash disbursements
A firm disburses cash for the following:
1. Payments of accounts payable to suppliers
2. Payments of salaries and other operating expenses
3. Capital expenditures
4. Long term investments such as investment in
properties
5. Loans (principal and interest)
6. Cash dividends
7. Acquisition of treasury stock
8. Income taxes and other taxes related to doing
business
Cash disbursements
Purchases of materials for production depend on
the production budget of the firm, which in turn
is based on the sales budget.
Cash disbursements
Management may consider alternative financing
options for its expenditures to adjust its cash
budget. For example, if trade financing requires
payment in 30 days and the cash budget shows
that this will be difficult for the firm,
management may consider short-term
borrowing from bank.
Target cash balance
This refers to minimum cash balance that the
firm intend to maintain for operations at all
times. The amount of target cash balances to be
maintained is influenced by the following factors:
1. Seasonality and stability of cash flows
2. Compensating balances required by bank
creditors
3. Access to financing
4. Economic conditions
Target cash balance
• A company whose cash flows are unstable or
unpredictable may require a higher target cash
balance.
• When there are many uncertainties in the
economy, management may also decide to
increase the level of target cash balance for
precautionary measures
• If a company has easy access to fund providers,
this may allow reduction in target cash balance.
Target cash balance
Example:
A company which is heavily dependent on
imported raw materials may prefer to maintain
relatively higher level of pesos when the
exchange rate is more volatile so that it can have
ready funds to purchase dollars that it needs.
Cumulative cash balance or
financing requirements
This section is important because it gives
management the idea whether financing will be
required, how much and when it will be needed.
• If the cash budget shows that there will be
financing requirements, management can
establish a credit line or look for possible fund
providers.
• Shows whether the company will be in a
position to pay off outstanding debt during the
cash period.