Distinction between Cash Budget & Cash flow Statement:
The following are the important points of distinction between a cash budget & a
cash flow statement:
- A cash budget is futuristic in approach. It is prepared on the basis of future
plan of action & in advance. On the other hand, a cash flow statement is prepared
on the basis of past data.
- A cash budget relates with the objectives that are to be achieved & is a plan
for inflows of cash & outflows of cash. Whereas, cash flow statement does
a post mortem analysis of actual inflows of cash & outflows of cash.
- The cash budget is usually prepared for a short period (may be a week, fortnight,
month or quarter). For a long period also (say, a year), a cash budget may be prepared
but division into short sub-budget periods is made (say, a month or quarter). Depending
upon the nature of the business of the firm & how accurately the estimates
can be made; the time span which will be covered by the cash budget will vary from
one firm to another firm. On the other hand, a relatively longer period, usually
an accounting year, is covered by a cash flow statement & it is not divided
into sub-periods.
- A cash budget is a tool used for budgeting & controlling of cash. While, cash
flow statement, for the past accounting year, analyses the working of the concern.
- A cash budget, for the purpose of judicious forecasting, requires only the previous
data. While, preparation of cash flow statement is made from the accounting data
at the beginning of an accounting year & at the end of an accounting year.
- Usually, the purpose of the management only is served by a cash budget whereas the purposes of the management along with the external parties are served by the cash flow statement.
Illustration 1:
Summarized below are the income & expenditure
forecasts for the month of month of March to August, 2010:
Month Sales Purchases Wages Manufacturing Office Selling
(all
credit) (all credit) expenses expenses expenses
$ $ $ $ $ $ }
March 35000 24000 6000 3000 1500 2750
April 37000 25000 5000 2500 1000 3000
May 38000 22000 7000 3500 1750 2500
June 34000 23000 4500 2250 1500 2250
July 32000 23500 5500 2500 1000 2500
August 36000 22500 5000 2000 1250 2750
The following further information has been given:
- Plant costing $ 10000 is due for delivery in July, 10% of the amount will be payable
on delivery & the balance will be paid after 3 months.
- In March & June each, advance tax of $ 5000 is payable.
- Period of credit allowed (a) to customers is 1 month & (b) payable to customers
is 2 months.
- Lag in payment of manufacturing expenses is 1/2 month.
- Lag in payment of all other expenses is 1 months.
- Prepare a cash budget for 3 months starting from 1st May 2010, when the cash balance was $ 5000.
Solution: Cash Budget for the quarter ended 31st July,
2010
May June July
Receipts: $ $ $
Sales (previous month) 37000 38000 34000
Payments:
Purchases (2 month’s previous) 24000 25000 22000
Wages (previous month) 5000 7000 4500
Manufacturing expenses (1/2 of
Previous month + ½ of current
Month) 3000 2875 2375
Office expenses (previous month) 1000 1750 1500
Selling expenses
(previous month) 3000 2500 2250
Advance tax 5000
Advance on delivery of plant (10%) 1000
36000 44125 33625
Cash flow 1000 (6125) 375
Opening balance 5000 6000 (125)
Closing balance 6000 (125) 250
Illustration 2: The following information relates to C ltd:
Wages
incurred Materials Purchased Overheads Sales
Month $ $ $ $
February 12000 40000 20000 60000
March 16000 60000 24000 80000
April 20000 50000 32000 120000
May 18000 70000 28000 100000
June 24000 60000 36000 140000
July 20000 50000 32000 120000
August 18000 50000 28000 100000
September 18000 60000 28000 100000
- Cash balance on 31st may is expected to be $ 44000.
- It may be assumed that wages may be paid within the month they are incurred.
- As per the company’s policy creditors for materials are to be paid within
the month they are incurred.
- It is expected that debtors will be paid 2 months after delivery.
- The overhead expenses are paid in 1 month delay.
- S 4000 per month representing depreciation on 1 delivery van & 2 cars are included
in the overhead expenses.
- 10% of the monthly sales are for cash & the balance 90% are sold on credit.
- On all sales on credit, a commission of 5% is paid to agents but the month following
the sales, to which it relates, the same is not paid; however in the overhead figures
shown, this expense is not included.
- Loan of $ 50000 is intended to be repaid on 30th June.
- In July, delivery of a new machine costing $ 90000 is expecting, of which on delivery
$ 30000 will be paid & $ 30000 in each of the following 2 month.
- It is assumed that if required overdraft facilities are available.
- Prepare a cash budget for each of the 3 months June, July & August.
Solution: Cash Budget for the period June, July & August
June
($) July
($) August
($)
Opening balance 44000 3500 (32800)
Receipts:
Cash Sales 14000 12000 10000
Debtors (refer workings) 108000 90000 126000
166000 105500 103200
Payments:
Wages 24000 20000 18000
Creditors (3 months’ previous) 60000 50000 70000
Overhead (previous month) 24000 32000 28000
Commission 4500 6300 5400
Loan 50000
Machine - 30000 30000
162500 138300 151400
Closing Balance 3500 (32800) (48200)
166000 105500 103200
Workings:
April May June July August
($) ($) ($) ($) ($)
Total Sales 120000 100000 140000 120000 100000
Cash Sales (10%) 12000 10000 14000 12000 10000
Credit Sales (90%) 108000 90000 126000 108000 90000
Collection (2 months
After sale) 108000 90000 126000
Commission (5% of
Previous month’s credit sales) 4500 6300 5400
Illustration 3:
On the basis of the following information prepare
monthly cash budget for six months beginning from April 2010:
(i) Monthly sales which have been estimated are as follows:
$ $
January 50000 June 40000
February 60000 July 50000
March 70000 August 40000
April 40000 September 30000
May 30000 October 50000
(ii) Estimated wages & salaries to be payable are as follows:
$ $
April 4500 July 5000
May 4000 August 4500
June 5000 September 4500
(iii) Out of the total sales, 80% is on credit & 20% for cash. Collection of 75%
of the credit sales are made within 1 month & the balance in 2 months. There are
no bad debt losses.
(iv) 80% of sales amount to purchases & in the month preceding the sales the purchases
are made & paid for.
(v) On April 1, 2010, there is 10% of debentures amounting $ 60000 & that is the
minimum desired level of cash balance. At the end of each month, any cash surplus/
deficit which are above/ below this level is made up either by temporary investments/
liquidation of temporary investments or by temporary borrowings (interest on these
to be ignored).
Solution: Cash Budget for six months, April to September,
2010
April May June July Aug Sep
$ $ $ $ $ $
Opening Balance 10000 10000 10000 10000 10000 10000
Receipts:
Cash Sales 8000 6000 8000 10000 8000 6000
Cash from debtors 54000 38000 26000 30000 38000 34000
Total Available 72000 54000 44000 50000 56000 50000
Payments:
Purchases 24000 32000 40000 32000 24000 40000
Wages & salaries 4500 4000 5000 5000 4500 4500
Interest on debentures 1500 - - 1500 - -
Advance Tax - -__ - 2500 -__ -___
Total Payments 30000 36000 45000 41000 28500 44500
Minimum desired
Balance 10000 10000 10000 10000 10000 10000
Total Requirement 40000 46000 55000 51000 38500 54500
Surplus (deficit) 32000 16000 (11000) (1000) 17500 (4500)
Temp. Investment 32000 16000 - - 17500 -
Liquidation of
Temporary investment
Or temp borrowing 11000 1000 4500
Workings:
Cash Sales & collection from debtors:-
Feb Mar Apr May June July Aug Sep
$ $ $ $ $ $ $ $
Total Sales 60000 70000 40000 30000 40000 50000 40000 30000
Cash 20% 12000 14000 8000 6000 8000 10000 8000 6000
Credit 80% 48000 56000 32000 24000 32000 40000 32000 24000
Collection:
1 month after sale 75% 42000 24000 18000 24000 30000 24000
2 months after sale 25% 12000 14000 8000 6000 8000 10000
54000 38000 26000 30000 38000 34000
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