Cash budgeting What is a budget An agreed

Cash budgeting

What is a budget? §An agreed plan of action for a period of time §A financial plan shown in monetary terms §Sets out financial targets for a business

Why use a budget? §To plan and allocate resources §To control income and expenditure §To forecast outcomes §To set targets §To motivate staff §To define levels of authority §To monitor performance against it

It is essential that a business prepares a cash budget for the financial period. The cash budget must show all the forecast cash inflows and cash outflows for the period. The cash budget will show whether the business expects to have a cash surplus or a cash shortage for the financial period.

Typical cash inflows §Cash sales §Payments from debtors §Proceeds from sale of fixed assets §Tax refunds §Rent received §Commission received

Typical cash outflows §Wages and salaries §Cash purchases §Payments to creditors §Purchase of fixed assets §Payment of rent §Payment of insurances §Cash drawings by the owner

Layout of a cash budget Balance at start Receipts Cash sales Debtors Payments Creditors Wages Balance at end Months 1 2 600 1000 3 1600 900 500 2000 1200 600 2800 1400 700 3700 400 600 1000 500 700 1200 1600 800 700 1500 2200

Timing differences for sales and purchases Adjustments will have to be made for the timing differences between the payment of creditors and the receipts from debtors. In a real situation, a sale will be made but the money may not be received until the next month. A purchase of materials will take place but no payment may be required for two months. Cash received and cash paid must be recorded in the cash budget in the month it is received or paid.

Points to note At AS level, you should be able to: §Explain the purpose of budgeting §Evaluate the benefits of budgeting §Prepare a cash budget. You do not need to know how to apply discounts to sales and purchases.