FinancialManagementPro.com

Cash Budget

By Yuriy Smirnov Ph.D.

Definition

A cash budget is a financial statement with itemized projected cash inflows and cash outflows, and a projected cash balance at the end of a budget period. It is necessary to know in advance about any cash flow gaps or idle cash balances. In other words, preparing a cash budget is an essential stage of cash management and financial planning.

If a company’s management determines there is a cash flow gap, it has to arrange additional financing in advance to provide a sufficient amount of cash. Idle cash can be used to repay loans or invested in marketable securities.

Primary purpose and components of a cash budget

Primary purpose

The primary purpose of cash budget preparation is to determine if a business will generate sufficient cash inflows to meet cash outflows in a particular budget period. In other words, it answers the question as to whether or not a business will have sufficient cash to operate.

Relationship with other budgets

A cash budget is a component of the master budget, but preparation involves using input data from other budgets, i.e., sales budget, direct material budget, and direct labor budget. In turn, the itemized cash flows are used as input data for financial budget preparation.

Template

The cash budget format usually has two parts:

  1. Cash inflows
  2. Cash outflows

Common examples of cash inflows are proceeds from cash sales, accounts receivables collected, fixed assets sales, sales of financial assets, proceeds from investing activities, and proceeds from long-term and short-term debt.

Common examples of cash outflows are direct materials and labor expenses, manufacturing overhead, administrative and selling expenses, purchases of fixed assets, purchases of financial assets, payments of short-term and long term debts, and dividends payout.

The template of a cash budget should include:

An example of such a template is shown below.

US$, in thousands

Cash budget template

Cash budget preparation example

The projected sales of Stiltrade LTD in the first quarter are as follows:

US$, in thousands

It is expected that 50% of accounts receivable will be collected in the same month when credit sales are made, 40% in the following month, and the remaining 10% the next month. Credit sales in December were $3,200,000 and $2,800,000 in November.

The projected direct materials expenses are estimated as 20% of total sales in the relevant month, direct labor expenses as 15%, manufacturing overhead as 25%, administrative expenses as 10%, and selling expenses as 5%.

It is also known that:

Thus, the cash budget of Stiltrade LTD for the first quarter should be as follows:

US$, in thousands

An example of cash budget preparation

January

Beginning cash balance = $125,000

Cash sales = $600,000

Collection of accounts receivables recognized in January = ($3,500,000 - $600,000) × 50% = $1,450,000

Collection of accounts receivables recognized in December = $3,200,000 × 40% = $1,280,000

Collection of accounts receivables recognized in November = $2,800,000 × 10% = $280,000

Direct materials = $3,500,000 × 25% = $875,000

Direct labor = $3,500,000 × 30% = $1,050,000

Manufacturing overhead = $3,500,000 × 15% = $525,000

Administrative expenses = $3,500,000 × 10% = $350,000

Selling expenses = $3,500,000 × 5% = $175,000

Interest paid = $55,000

Cash surplus = $600,000 + $1,450,000 + $1,280,000 + $280,000 - $875,000 - $1,050,000 - $525,000 - $350,000 - $175,000 - $55,000 = $580,000

Ending cash balance = $125,000 + $580,000 = $705,000

February

Beginning cash balance = $705,000

Cash sales = $500,000

Collection of accounts receivables recognized in February = ($3,200,000 - $500,000) × 50% = $1,350,000

Collection of accounts receivables recognized in January = ($3,500,000 - $600,000) × 40% = $1,160,000

Collection of accounts receivables recognized in December = $3,200,000 × 10% = $320,000

Direct materials = $3,200,000 × 25% = $800,000

Direct labor = $3,200,000 × 30% = $960,000

Manufacturing overhead = $3,200,000 × 15% = $480,000

Administrative expenses = $3,200,000 × 10% = $320,000

Selling expenses = $3,200,000 × 5% = $160,000

Interest paid = $55,000

Dividend paid = $1,450,000

Cash deficit = $500,000 + $1,350,000 + $1,160,000 + $320,000 - $800,000 - $960,000 - $480,000 - $320,000 - $160,000 - $55,000 - $1,450,000 = $895,000

Ending cash balance = $705,000 - $895,000 = -$190,000

March

Beginning cash balance = -$190,000

Cash sales = $800,000

Collection of accounts receivables recognized in March = ($3,900,000 - $800,000) × 50% = $1,550,000

Collection of accounts receivables recognized in February = ($3,200,000 - $500,000) × 40% = $1,080,000

Collection of accounts receivables recognized in January = ($3,500,000 - $600,000) × 10% = $290,000

Direct materials = $3,900,000 × 25% = $975,000

Direct labor = $3,900,000 × 30% = $1,170,000

Manufacturing overhead = $3,900,000 × 15% = $585,000

Administrative expenses = $3,900,000 × 10% = $390,000

Selling expenses = $3,900,000 × 5% = $195,000

Interest paid = $55,000

Cash surplus = $800,000 + $1,550,000 + $1,080,000 + $290,000 - $975,000 - $1,170,000 - $585,000 - $390,000 - $195,000 - $55,000 = $350,000

Ending cash balance = -$190,000 + $350,000 = $160,000

As we can see, the dividend payout scheduled for February causes a cash flow gap of $190,000. So, the company’s management has to raise additional funds to cover it.