Financial Management

Cash Budget

Vikas Kulkarni

2016125
 Introduction
The cash budget contains an itemization of the projected sources and uses of cash in a
future period. This budget is used to ascertain whether company operations and other
activities will provide a sufficient amount of cash to meet projected cash requirements. If
not, management must find additional funding sources.
The inputs to the cash budget come from several other budgets. The results of the cash
budget are used in the financing budget, which itemizes investments, debt, and both
interest income and interest expense.

The cash budget is comprised of two main areas, which are Sources of Cash and Uses of
Cash. The Sources of Cash section contains the beginning cash balance, as well as cash
receipts from cash sales, accounts receivable collections, and the sale of assets. The Uses
of Cash section contains all planned cash expenditures, which comes from the
direct materials budget,direct labor budget,manufacturing overhead budget, and
selling and administrative expensebudget. It may also contain line items for fixed asset
purchases and dividends to shareholders.

If there are any unusually large cash balances indicated in the cash budget, these balances
are dealt with in the financing budget, where suitable investments are indicated for them.
Similarly, if there are any negative balances in the cash budget, the financing budget
BREAKING DOWN 'Cash Budget'
Assume, for example, ABC Clothing manufactures shoes, and the company estimates
$300,000 in sales for the months of June, July and August. At a retail price of $60 per pair, the
company estimates 5,000 pairs of shoes sales each month. ABC forecasts that 80% of the
sales is going to be collected in the month following the sale and the other 20% collected two
months after the sale. The beginning cash balance for July is forecasted to be $20,000, and
the cash budget assumes 80% of the June sales is going to be collected in July, which equals
$240,000, or $300,000 x 80%. ABC also projects $100,000 in cash inflows from sales made
earlier in the year.

How Production Is Calculated

ABC must also calculate the production costs required to produce the shoes and meet
customer demand. The company expects 1,000 pairs of shoes to be in beginning inventory,
which means that 4,000 pairs must be produced in July. If the production cost is $50 per pair,
ABC spends $200,000, or $50 x 4,000, on cost of sales, which is the manufacturing cost. The
company also expects to pay $60,000 in costs not directly related to production, such as
insurance.

Factoring in a Cash Roll Forward

A cash roll forward computes the cash inflows and outflows for a month and uses the ending
balance as the beginning balance for the following month. This process allows the company to
forecast cash needs throughout the year and changes to the roll forward adjust the cash
balances for all future months. In this example, ABC computes the cash inflows by adding the
receivables collected during July to the beginning balance, which is $360,000, or $20,000
 Example of the Cash Budget
Here is an example of the cash budget, showing the sources and uses
of cash by week:
Week 1 Week 2 Week 3 Week 4
Beginning cash $25,000 $55,000 -$24,000 -$63,000
Sources of Cash
+ Cash sales +10,000 +12,000 +15,000 +18,000
+ Accounts receivable +180,000 +185,000 +180,000 +192,000
collected
+ Asset sales +30,000 0 +10,000 +25,000
= Total cash available $245,000 $252,000 $181,000 $172,000
Uses of Cash
- Direct materials -$87,000 -$91,000 -$99,000 -$107,000
- Direct labor -19,000 -20,000 -23,000 -25,000
- Manufacturing overhead -29,000 -30,000 -34,000 -37,000
- Selling & administrative -35,000 -35,000 -38,000 -38,000
- Asset purchases -20,000 0 -50,000 0
- Dividend payments 0 -100,000 0 0
= Total uses of cash -$190,000 -$276,000 -$244,000 -$207,000
Net Cash Position $55,000 -$24,000 -$63,000 -$35,000
The example shows that an inordinately large dividend payment in the
second week of the cash budget, coupled with a large asset purchase in the
following week, places the company in a negative cash position. Paying out
such a large dividend can be a problem for lenders, who do not like to issue
loans so that companies can use the funds to pay their shareholders and
thereby weaken their ability to pay back the loans. Thus, it may be wiser for
the company to consider a small dividend payment and avoid a negative
cash position.

Other Cash Budget Issues

Cash balances may fluctuate considerably within a single accounting
period, thereby masking cash shortfalls that can put a company in
serious jeopardy. To spot these issues, it is quite common to create and
maintain cash forecasts on a weekly basis. Though these short-term
budgets are reasonably accurate for perhaps a month, the precision of
forecasting declines rapidly thereafter, so many companies then switch
to budgeting on a monthly basis. In essence, a weekly cash budget
begins to lose its relevance after one month, and is largely inaccurate
after two months.
Thank
you!