CASH BUDGET NOTES.
Budget are drawn up to help management to be aware of any potential shortages or
surpluses of cash resources that could occur. Cash Budget deals only with transactions
involving movement of cash, non-cash expenses are not included.
IMPORTANCE OF A CASH BUDGET.
 The cash budget is an essential tool used to plan and monitor the Liquidity of the
business enterprise. The management can ascertain whether the enterprise will have
enough cash:
 To meet the short-term commitments such as paying creditors and
repaying loans
 To purchase stock
 To purchase additional fixed assets
 Budget will assist the enterprise to predict shortfalls, and arrangements can be
made with banks, and other sources of funding in advance.
 Budget improves decision making
 Many potential funders will require you to provide a budget in addition to a business
plan, particularly if you are new in business
 Increase staff motivation as they have to meet targets
BUDGET PERIODS
 Short-term – Maximum is 12 months
 Medium-term – 1 to 2 years
 Long-term – 3 years or longer
POINTS TO CONSIDER WHEN DRAWING THE BUDGET
 The budget must be conservative – It must be achievable and realistic
 Budget expenditure should not exceed budget income
 After the budget period, the budget income and expenditure must be compared
with actual figures.
When a budget is prepared, the inflow and outflow of cash is needed to be predicted
(forecast)
CASH RECEIVED (INFLOW)
CASH PAID OUT (OUTFLOW)
Cash Sales
Cash purchases of trading stock & fixed
assets
Receipts from Debtors (Debtors’ Collection) Payments to creditors
Rent Income
Operating expense e.g. rent, salaries,
telephone, etc.
Interest Received (on investments)
Cash withdrawals by the owner
Investments matured
Cash invested
Proceeds from sales of fixed assets
Purchase of fixed assets
Loan Received
Loans repayments
Cash Receipts
Cash Payments
Cash Surplus /Shortfall
Bank Opening Balance
Bank Ending Balance
MAIN COMPONENTS OF THE BUDGET
Prediction of cash receipts (inflow) for the budget period
Predictions of cash paid (outflow) for the budget period
Total cash receipts less Total cash payments
The bank balance at the beginning of the budget period
The expected bank balance at the end of the budget period
THIS SECTION WILL COVER
 Debtors’ Collection Schedule
 Creditors’ Payments Schedule
 Cash Budget
 Projected Income Statement
EXAMPLE 1
GREEN STORE’S CREDIT SALES WERE AS FOLLOWS:
MONTHS
ACTUAL
BUDGETED
July
R80 000
August
R90 000
September
R96 000
October
R100 000
November
R110 000
Debtors usually settle their accounts as follows
 50% during the month of sales (transaction month)
 30% during the month following the month of sales (one month after sales/30days)
 18% during the second month after sales (two months after sales/60 days)
 2% irrecoverable debts (bad debts/90 days)
Required
Calculate the expected collection from debtors during the budgeted months of September,
October and November.
EXAMPLE 2
Make use of the information provided below to draw up the debtors’ collection period for
the Three-month period 01 January 2013 to 31 March 2013
MONTHS
ACTUAL
BUDGETED
November
R60 000
December
R80 000
January
R50 000
February
R52 000
March
R60 000
Debtors usually settle their accounts as follows:
 60% of debtors pay one month after the date of sale
 20% of debtors pay two months after the date of sales
 15% of debtors pay three months after the date of sale
 5% irrecoverable debts (bad debts)
Note: Cash sales is 40% of total sales