Cash Budge 2
Cash Budget
What is a Cash Budget?
A cash budget is like a plan that businesses use to track:
- How much cash is coming in (receipts) and
- How much cash is going out (payments) during a specific time (like a week, month, or year).
Why do we Need a Cash Budget?
Just like you plan how to use your pocket money to avoid running out, businesses also need to plan their money. A cash budget helps a business:
- Pay Bills on Time: Things like salaries, rent, or buying materials.
- Avoid Borrowing Too Much: By knowing how much money they'll have, they can plan better and borrow less.
- Save for the Future: It helps businesses figure out when they'll have extra cash to invest or expand.
- Prepare for Emergencies: A cash budget helps keep money ready for unexpected expenses.
A cash budget has 3 main parts
-
Cash Inflows: This is all the money a business expects to receive.
- Examples: Sales made to customers (cash sales), Payments from customers who bought on credit, Loans or money invested by the owners.
-
Cash Outflows: This is all the money a business plans to spend.
- Examples: Paying salaries, rent, or bills, Buying raw materials or inventory. Paying back loans or interest.
-
Cash Balance: After adding up the inflows and outflows, the business checks how much money is left.
- Formula: Cash Balance = Cash Inflows – Cash Outflows.
How to Make a Cash Budget?
Here are the simple steps to create a cash budget:
- List All Your Cash Inflows: Write down all the money the business expects to receive during a specific period.
- List All Your Cash Outflows: Write down all the expenses the business expects to pay during that same time.
- Calculate the Cash Balance: Subtract the outflows from the inflows to see if the business will have extra cash (surplus) or not enough cash (deficit).
- Plan for Surpluses or Deficits: If there's extra cash, the business can save or invest it. If there's not enough, the business can plan to borrow money or cut back on spending.
Challenges in Making a Cash Budget
- Unexpected Changes: Sometimes, things don't go as planned, like customers paying late.
- Overestimating Income or Underestimating Expenses: If the estimates are wrong, the budget won't be accurate.
- Seasonal Fluctuations: Some businesses earn more in certain seasons and less in others, which can complicate budgeting.
Summary
- A cash budget is a simple but powerful tool to manage a business's money.
- It tracks what's coming in, what's going out, and how much is left.
- By planning ahead, businesses can avoid running out of cash and prepare for both opportunities and emergencies.
Let us solve a question for better understanding
Q1 – From the following Data Forecast the cash position at the end of April, may, June 2024
| Month 2024 | Sales | Purchase | Wages | Sales Expense |
|---|---|---|---|---|
| February | 1,00,000 | 90,000 | 10,500 | 2,500 |
| March | 1,10,000 | 1,00,000 | 11,000 | 2,600 |
| April | 60,000 | 1,10,000 | 7,000 | 2,000 |
| May | 1,20,000 | 1,15,000 | 10,500 | 3,000 |
| June | 80,000 | 90,000 | 8,500 | 2,200 |
Further information
- Sales at 10% realized in the month of sales, Balance Equally realized in two subsequent months
- Purchases: creditors are paid in the month following the month of supply
- Wages : 20% Paid in arrears in the following month
- Sales Expense paid in the month itself.
- Income tax 30000 Payable in June
- Dividend 12000 payable in June
- Income from investment 5000 received half yearly in march and September
- Cash balance in hand as on 1st April 2025 is 50000
Cash Budget For three months Ending June 2024
| Particular | April | May | June |
|---|---|---|---|
| Opening Balance of Cash | 50000 | 40700 | 6400* |
| + Receipts of Cash | |||
| Cash Sales 10% | 6000 | 12000 | 8000 |
| Cash Received From Debtor (WN) | 94,500 | 76,500 | 81,000 |
| Total Receipts (a) | 150,500 | 129,200 | 95,400 |
| - Payments | |||
| Creditor for Purchase | 1,00,000 | 1,10,000 | 1,15,000 |
| Wages: Current 80% | 5,600 | 8,400 | 6,800 |
| arrears 20% | 2,200 | 1400 | 2,100 |
| Sales Expense | 2,000 | 3,000 | 2,200 |
| Income Tax | -- | -- | 30,000 |
| Dividend | -- | -- | 12,000 |
| Total Payments (b) | 109,800 | 122,800 | 168,100 |
| Closing Balance (a-b) | 40700 | 6400* | -72,700 (cash deficit) |
Working Note 1 - Collection of Sales
| Particular | Feb | March | April | May | June |
|---|---|---|---|---|---|
| Total Sales | 1,00,000 | 1,10,000 | 60,000 | 1,20,000 | 80,000 |
| - Cash Sales (10%) | 10,000 | 11,000 | 6,000 | 12,000 | 8,000 |
| Credit Sales | 90,000 | 99,000 | 54,000 | 108,000 | 72,000 |
| Installment (Next 2 month) | 45,000 | 49,500 | 27,000 | 54,000 | |
| 45,000 | 49500 | 49,500 | 27,000 | ||
| 45,000 | 94,500 | 76,500 | 81,000 |
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