Cash Budget.

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 Learning Goals.
oIn this Section, we will learn the following points:
 We will learn how to prepare the cash budget.
 We will learn how to evaluate the cash budget.

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 Cash Budget.
oThe cash budget or cash forecast is a statement of the firm’s planned
inflows and outflows of cash.
oA cash budget is simply a listing of the firm’s anticipated cash inflows
and outflows over a specified period it includes only actual cash flows.
It is also called “Statement of budgeted cash receipts and
disbursements”.

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 The uses of Cash Budget.
1) It is used to estimate short-term cash requirements with particular
attention to anticipated cash surpluses and shortfalls.
oSurpluses must be invested and deficits must be funded.
2) The cash budget is a useful tool for determining the timing of cash
inflows and outflows during a given period.
oTypically, cash budgets are developed covering a 1-year time
period.

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 The reasons for preparing
Cash Budget.
oThe cash Budget is prepared to:
1) To control income and expenditure.
2) To forecast outcomes.
3) To set targets.
4) To motivate staff.
5) To monitor performance.

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 What are the types of cash
flow of the firms?.
oThe cash flow of the firm is either:
1) Cash inflow ( sources).
2) cash outflow (uses).

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 The difference between cash
inflow and cash outflow.
Cash inflow Cash outflow
1) Sales and other cash income. 1) Cash expenses.
2) New loans received. 2) Principal payments.
3) Sales of capital assets. 3) Purchase of capital assets.
4) Beginning cash on hands. 4) Ending cash on hands.

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 Cash Budget doesn’t
Include the following.
1) Depreciation.
2) Opportunity cost.
3) Any other non-cash income or expenses.

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The General Format of the
Cash Budget.

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 Steps Needed to Prepare the
Cash Budget.
oTo prepare the cash budget, we need to
follow the following steps:
Step1: Calculate the Cash Receipts.
Step2: Calculate the Cash Disbursements.
Step3:Prepare the Cash Budget
“according to the format in the previous
slide”.
Step 4: Evaluate the Cash Budget.
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 Cash Receipts.
oCash Receipts = All the firm’s inflows of cash in a given period.
oThe most common components of cash receipts are:
1)Cash sales.
2)Collection of account receivables.
3)Other cash receipts.

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 Cash Disbursements.
oCash Disbursement = all the outlays of the cash by the firm during a given financial
period.
oThe most common components of cash disbursement:
1) Cash purchases.
2) Payment of account payable.
3) Rent (or lease) expenses.
4) Wages and salaries.
5) Tax payments.
6) Fixed assets outlays.
7) Interest payment.
8) Cash dividend payments.
9) Principal payments (loans)
10) Repurchase or retirement stocks. 12
Problems.

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 Problem 1.
oBrownstein Inc. had sales of $60,000 in May and $70,000 in June. Forecasts
sales for July, August, September are $80,000, $90,000, $110,000 respectively.
The firm has a cash balance of $6,000 in July 1 and wishes to maintain a
minimum cash balances of $8,000. Given the following data, prepare and
interpret a cash budget for months: July, August, September.
1. The firm makes 20% of sales for cash, 40% of its sales in each of 2 months
following the sales.
2. In September, Brownstein will receive a $3,000 dividend from stock in
subsidiary
3. Purchases will represent 70% of sales- 10 percent will be paid immediately
in cash, 70 percent is paid the month following the purchase, and the
remaining 20 percent is paid two months the following purchase.
4. Rent is $4,000 per month. 14
 Problem 1.
5. Wages and salaries are 10% of the previous month sales.
6. Cash dividends of $4,000 will be paid in August.
7. A portion of loan is $3,000 is due in August.
8. Payment of interest of $2,000 is due in August .
9. A cash purchases of capital asset costing $7,000 is scheduled in
September.
10. Taxes of $7,000 are due in August.

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 Problem 1.
Requirements:
1. Prepare Cash Budget for
Brownstein Inc. for July, August
and September.
2. Evaluate the Cash Budget for
Brownstein Inc.

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 A schedule of projected cash receipts for Brownstein

Expectations
May June July August September
Forecast sales $60,000 $70,000 $80,000 $90,000 $110,000
Cash sales (20%) $12,000 $14,000 $16,000 $18,000 $22,000
= forecast sales x
0.20
Collection of A/R
Lagged 1 months $24,000 $28,000 $32,000 $36,000
(40%)
= forecast sales x0.40

Lagged 2 months $24,000 $28,000 $32,000

(40%)
=Forecast sales x0.40

Other cash receipts $3,000

Total Cash Receipts $68,000 $78,000 $93,000

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 Answer Problem 1.
oCalculation of Purchases (70% of Sales)
Purchases in May = 60,000 x0.70 = $42,000
Purchases in June = 70,000 x 0.70 = $49,000
Purchases in July = 80,000 x0.70 = $56,000
Purchases in August = 90,000 x0.70 = $63,000
Purchases in September = 110,000 x0.70 = $77,000

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 A schedule of projected cash disbursements for Brownstein
May June July August September
Purchases (0.70xsales) $42,000 $49,000 $56,000 $63,000 $77,000

Cash purchase (10%) $4,200 $4,900 $5,600 $6,300 $7,700

Purchases x0.10

Payment of A/P
Lagged 1 month (70%) $29.,400 $34,300 $39,200 $44,100

Lagged 2 months (20%) $8,400 $9,800 $11,200

Rent payment $4,000 $4,000 $4,000

Wages and salaries $7,000 $8,000 $9,000
(10% of sales)
Sales x 10%

Cash dividend payment $4,000

Principal payment $3,000

(loan)
Interest payment $2,000
Fixed asset outlays $7,000
Tax payment $7,000
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Total cash $59,300 $83,300 $83,000
 A cash budget for Brownstein ($)

July August September

Cash Receipts $68,000 $78,000 $93,000

Less: Cash Disbursemets $59,300 $83,300 $83,000

Net Cash flow $8,700 ($5,300) $10,000

Add: Beginning cash $6,000 $14,700 $9,400

Ending cash $14,700 $9,400 19,400$

Less: minimum cash $8,000 $8,000 $8,000

balance
Required total Financing
(note payable)
Excess cash Balance $6,700 $1,400 $11,400
(Marketable securities)
We need a financing source to
We can use excess in
cover the deficit ex: take a short
investment (marketable
term borrowing
 Answer Problem 1.
Net Cash Flow = Cash Receipts – Cash Disbursements.

Ending Cash = Net Cash Flow + Beginning Cash .

Required Financing or Excess Cash Balance = Ending Cash – Minimum

Cash Balance.

If Result is Positive Number If Result is Negative Number

⸫Excess Cash Balance. ⸫Required Financing. 21
Evaluating the Cash Budget.
Account End-of-month-balance
July August September
Cash $8,000 $8,000 $8,000
Marketable Securities $6,700 $1,400 $11,100
Note Payable $0 $0 $0

 Brownstein Inc. has no deficit in its cash budget in months: July, August
and September.
 Brownstein Inc. has a surplus cash in months: July, August and September
which can be used in investment (marketable securities).
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 Problem 2.

oTake 15 minutes to solve

by your self.

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 Problem 2.
oGrenoble Enterprise had sales of $50,000 in March and $60,000 in April.
Forecasts sales for May, June, July are $70,000, $80,000, $100,000 respectively.
The firm has a cash balance of $5,000 and wishes to maintain a minimum cash
balances of $5,000. Given the following data, prepare and interpret a cash budget
for months: May, June, July.
1. The firm makes 20% of sales for cash, 60% of its sales in the next month and
the remaining 20% are collected in the second months following the sale.
2. The firm receives other income of $2,000 per month.
3. The firm’s actual or expected purchases, all , made for cash are $,50,000 ,
$70,000, $80,000 from the months of may through July respectively.
4. Rent is $3,000 per month. 24
 Problem 2.
5. Wages and salaries are 10% of the previous month sales.
6. Cash dividends of $3,000 will be paid in June.
7. Payment of principal and interest of $4,000 is due in June.
8. A cash purchases of equipment costing $6,000 is scheduled in July.
9. Taxes of $6,000 are due in June.

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 Problem 2.
Requirements:
1. Prepare Cash Budget for
Grenoble Enterprise for May,
Jube and July.
2. Evaluate the Cash Budget for
Grenoble Enterprise.

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 A schedule of projected cash receipts for Grenoble enterprise

Expectations
March April May June July
Forecast sales $50,000 $60,000 $70,000 $80,000 $100,000
Cash sales (20%) $10,000 $12,000 $14,000 $16,000 $20,000
= forecast sales x
0.20
Collection of A/R
Lagged 1 months $30,000 $36,000 $42,000 $48,000
(60%)
= forecast sales
x0.60
Lagged 2 months $10,000 $12,000 $14,000
(20%)
=Forecast sales
x0.20
Other cash $2,000 $2,000 $2,000 $2,000 $2,000
receipts
Total Cash $62,000 $72,000 $84,000
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Receipts
 A schedule of projected cash disbursements for Grenoble Enterprise

March April May June July

Cash Purchases $50,000 $70,000 $80,000

Rent payment $4,000 $4,000 $4,000

Wages and $6,000 $7,000 $8,000
salaries (10% of
sales)
Sales x 10%
Cash dividend $3,000
payment

Principal and $4,000

Interest payment
Fixed asset outlays $6,000

Tax payment $6,000

Total cash $59,000 $93,000 $97,000

disbursement 28
 A cash budget for Grenoble enterprise($)

May June July

Cash Receipts $62,000 $72,000 $84,000

Less: Cash Disbursemets $59,000 $93,000 $97,000

Net Cash flow $3,000 ($21,000) ($13,000)

Add: Beginning cash $5,000 $8,000 ($13,000)

Ending cash $8,000 ($13,000) ($26,000)

Less: minimum cash $5,000 $5,000 $5,000

balance
Required total ($18,000) ($31,000)
Financing (note payable)
Excess cash Balance $3,000
(Marketable securities)
We need a financing source to
We can use excess in
cover the deficit ex: take a short
investment (marketable
term borrowing
Evaluating the Cash Budget.
Account End-of-month-balance
May June July
Cash $5,000 $5,000 $5,000
Marketable Securities $3,000 $0 $0
Note Payable $0 $18,000 $31,000

 Grenoble Enterprise has a deficit in its cash budget in months: June and
July that is needed to be financed.
 Grenoble Enterprise has a surplus cash in months of May which can be
used in investment (marketable securities).
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Section 2Assignment
Problem.

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 Assignment Problem .
oSunrise industries had sales of $40,000 in August and $50,000 in September.
Forecasts sales for October, November and December are $60,000, $70,000,
$90,000 respectively. The firm has a cash balance of $7,000 in October 1 and
wishes to maintain a minimum cash balances of $6,000. Given the following
data, prepare and interpret a cash budget for months: October, November and
December.
1. The firm makes 30% of sales for cash, 50% are collected in the next month and
the remaining 20 % are collected in the second months following the sale
2. The firm will receive income of $4,000 per month.
3. Purchases will represent 60% of sales- 20 percent will be paid immediately in
cash, 50 percent is paid the month following the purchase, and the remaining
20 percent is paid two months the following purchase.
4. Rent is $3,500 per month. 32
 Assignment Problem .
5. Wages and salaries are 15% of the previous month sales.
6. Cash dividends of $3,000 will be paid in October .
7. Payment of Principal and interest of $4,000 due in November
8. A cash purchases of equipment costing $5,500 is scheduled in December
9. Taxes of $5,000 are due in November.

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 Assignment Problem.
Requirements:
1. Prepare Cash Budget for Sunrise
Industries for October,
November and December.
2. Evaluate the Cash Budget for
Sunrise Industries.

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