Financial Budget & Cash Budget
Financial Budget:
The functional budget by which the whole packages of budgets are summarized is made
up of the five individual budgets:
- Cash Budget: Cash budget shows in respect of various
functional budgets; the requirements of cash as well as the anticipated cash receipts.
It is concerned with liquidity.
- Budgeted Profit & Loss Account: The budgeted revenues
during the period gets matched with the same period’s budgeted costs & the
same is reflected by the budgeted profit & loss account. It is concerned with
profitability.
- Budgeted Balance Sheet: It is concerned with the asset’s
structure & the liabilities’ pattern.
- Budgeted Fund Flow statement: In the organizations’ objective-striving
endeavor’s, budgeted fund flow statement is concerned with the sources of
funds & the applications of funds.
- Capital Budget: The capital budget is concerned with the questions relating to capacity & the direction which is strategic. The evaluation of alternative dispositions of capital funds as well as the choice of the capital structure which is the best is dealt with by the capital budget.
Cash Budget:
As the name implies, the summarization
of the estimated cash receipts as well as the cash payments over the period of budget
is done by the cash budget. Ensuring a balance between liquidity & profitability
is its main object. The minimizing of the level of cash without, at the same time,
running the risk that the organization will not be able to pay the bills when they
become due, is the aim of the management. As the cash itself is unproductive, it is
minimized. For sound financial management, it is absolute necessity that a carefully
developed estimation of cash position & cash needs, is required to be done. Such
estimates are required by the money-lending agencies before they can grant credit.
An evaluation of the probable position
of cash for the immediate budget period becomes possible by the determination of probable
cash receipts & probable cash payments. The cash positions’ evaluation in
this manner may indicate- (a) some form of financing needs so that the anticipated
cash deficits can be covered, or (b) the need for management planning so that the excess
cash can be put to use profitably. There is a close relation between the cash budget & the
forecast of sales, expenses budget & capital expenditure budget. However, a desirable
cash position does not get automatically bought by the planning & controlling of
these factors. An essential distinction between the cash budget & other budgets
is suggested by cash budget. The timing of receipts & payments of cash (cash basis),
is dealt with by the cash budget, whereas the timing or incurrence of the transactions
themselves (accrual basis) is dealt with by the other assets.
Purposes Of Cash Budget:
The principal purposes of the cash budget are as follows:
- Indication of the probable cash position resulting out of planned operations.
- Indication of excess or shortages of cash.
- Provision for co-ordination of cash in relation to (i) sales, (ii) investment,
(iii) total working capital & (iv) debt.
- Indication of the needs for the arrangement of short-term borrowing, or for the
purpose of investment, the availability of idle cash.
- For the purpose of obtaining credit; the establishment of sound basis.
- Establishment of a sound basis for the purpose of current controlling of the cash position.
Methods of Preparing Cash Budget:
For the preparation of a cash budget,
two methods are there: (a) receipts & payments method & (b) funds flow method.
(a) Receipts & Payments Method:
It is normally prepared in advance
by month for the budget year. The preparation of cash budget starts with the
forecast balance of cash at the commencement of the budget period, & with that,
the budgeted receipts for each month gets added & then the budgeted payments gets
deducted, for ascertaining the expected cash balance at each month’s end. The
usual items which are to be included in cash budgets are as follows:
- Sales revenue per the sales budget, plus any budgeted decrease in debtors
or minus any budgeted increase in debtors, as the case may be.
- Production costs per the production cost budget, plus any stock increase,
minus any creditors’ increase.
- Administration costs, selling & distribution costs & research & development
costs, plus any stock increase, minus any creditors’ increase.
- Capital expenditure per the capital expenditure budget, & any cash, which on
sale or scrapping of assets, will be received.
- Dividends, interest & rent receipts.
- Tax payments.
- On long term contracts, expected payments of dividend & progress payments.
- Any cash which is to be received on issue of shares, debentures etc. or to be paid on redemption of preference shares or debentures.
It is possible to see whether there will be sufficient cash with the concern not only at the end of the year, but also all the times during the year, by scheduling receipts & payments by month & carrying forward from month to month, the cumulative balance. Hence, for raising any required additional funds or investing any temporary surplus, plans can be made.
(b) Funds Flow method: The
fund flow method of cash budgeting substitutes, for items (i) to (iii); cash from operations.
Items from (iv) to (viii) will appear in the same way as in receipts & payments
method. By taking net profit as the basis & making adjustments for (a) depreciation,
(b) non-operating incomes & expenses & (c) increase or decrease in current
account items except cash, cash from operations can be determined.
The main problem with this method
is that the provision of month wise information is not possible. Thus, mainly for long
term cash budgeting, the fund flow method is used. On the other hand, the receipts & payments
method is more useful for short-term cash budgeting.
Online Live Tutor Purposes Of Cash Budget, Methods of Preparing Cash Budget:
We have the best tutors in Economics in the industry. Our tutors can break down a complex Purposes Of Cash Budget, Methods of Preparing Cash Budget problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Purposes Of Cash Budget, Methods of Preparing Cash Budget concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Purposes Of Cash Budget, Methods of Preparing Cash Budget tutoring and experience the quality yourself.
Online Financial Budget & Cash Budget Help:
If you are stuck with an Financial
Budget & Cash Budget Homework problem and need help, we have excellent tutors
who can provide you with Homework Help. Our tutors who provide Financial Budget & Cash
Budget help are highly qualified. Our tutors have many years of industry experience
and have had years of experience providing Financial Budget & Cash Budget Homework
Help. Please do send us the Financial Budget & Cash Budget problems on which you
need help and we will forward then to our tutors for review.
