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Cash Forecasting And Budgeting

Cash Forecasting Budgeting Assignment / Homework Help
Cash forecasting & budgeting is very important because it enables the firm to maintain short-term liquidity. After preparing cash budgets, if there is excess cash available, it can be invested productively in short-term marketable securities or short-term investments. This enables the firm to earn an interest income out of the excess cash which otherwise would have remained as idle cash. If there is a shortage of cash during any particular month, the firm can arrange for short-term funds in advance and thus maintain short-term liquidity always.

To prepare a cash budget, the following components should be known:
  • Timing of cash inflows and outflows
  • Magnitude of receipts and payments (expected sales and expenses)
  • Desired cash position

Methods of preparing cash budgets:
  • Receipts & Payments method
  • Adjusted Profit & Loss method
  • The Balance Sheet method

The most popular method of preparing cash budget is by the Receipts & Payments method. The most common Receipts & Payments are:

  • Cash sales
  • Collection from credit sale customers
  • Any disposal value of fixed assets

  • Payments to creditors or suppliers
  • Raw materials payments
  • Payment of wages and salaries
  • Overhead expenses
  • Selling, general and administrative expenses
  • Maintenance and miscellaneous expenses
  • Tax payments
  • Purchase of fixed assets
  • Retirement of Long-term debts etc.


Preparation of Cash Budget

ABC Ltd. Furnishes the following forecast of the quarter ending 31st March 2010.

Sales: January 2010 => $ 1,200,000
February 2010 => $ 1,100,000
March 2010 => $1,400,000

During the month of December 2009, the company made a sale of $1,000,000 and computed the cost of sales as following:

Raw Materials = $ 350,000
Wages (variable) = $ 175,000
Overheads (variable) = $ 175,000
Overheads (fixed) = $ 150,000

The fixed overheads include depreciation of $ 40,000.

Other information: 1/5th of the sales will be made on cash with a cash discount of 1.5%. Of the remaining portion, 50% is collected in the same month and the balance in the next month. Raw material suppliers allow a credit of one month. Wages are paid on the same month. Fixed overheads are paid in the same month and variable overheads in the following month. The percentage of contribution to sales as obtained in December 2009 is expected to be maintained during the forth coming quarter also. The cash balance as on 1st Jan 2010 is $50,000. The company has to pay $60,000 as wages during March 2010. All the production will be sold the same month. Term-loan interest of $350,000 is payable in January 2010 and the bank will debit quarterly interest of $400,000 on drawings in March 2010.

Solution: Cash Budget for the quarter period Jan-March 2010

Jan Feb Mar
Opening Balance $50,000 ($28,600) $175,600
Cash Receipts:
Cash Sales $240,000 $220,000 $280,000
Less: Discount $3,600 $3,300 $4,200
Net Cash sales $236,400 $216,700 $275,800
Collection from Debtors $480,000 $440,000 $560,000
Collection from Debtors $400,000 $480,000 $440,000
Total receipts + Op.Bal $1,166,400 $1,108,100 $1,451,400

Cash Payments:
Raw materials payments $350,000 $420,000 $385,000
Wages $210,000 $192,500 $245,000
Variable overheads $175,000 $210,000 $192,500
Fixed overheads $110,000 $110,000 $110,000
Wages payable $60,000
Term - loan interest $350,000
Bank-quarterly interest $400,000
Total Payments $1,195,000 $932,500 $1,392,500

Ending cash balance ($28,600) $175,600 $58,900

Workings: For Jan 2010
  • Collection from Debtors: 50% of 4/5th of sales will be collected the same month and the balance the following month. So, $1,200,000 x 4/5 * 50/100 => $480,000 will be collected in Jan and balance $480,000 in Feb. Similarly, 50% of 4/5th of Sales of December will be collected in Jan ($1,000,000 x 4/5 x 50/100 => $400,000)
  • Cost of Raw materials: It is given that the percentage of contribution to sales as obtained in December 2009 is expected to be maintained during the forth coming quarter. So, for $1,000,000 sales in Dec, $350,000 was the raw materials. So, being variable, for $1,200,000 sales in Jan, Raw materials = $350,000/$1,000,000 x $1,200,000 => $420,000 of cost of Jan will be paid in Feb.
  • Cost of variable wages and variable overheads is similar to the calculation done for raw materials cost.
  • The same way, calculations have to be done for February and March.
  • The ending cash balance of a month is the opening cash balance of the following month.

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