Cash Budget

It is an estimate of cash receipts and disbursements during a future period of time. “The Cash Budget is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay” (Soleman, Ezra – Handbook of Business administration).
Procedure for Preparation of Cash Budget
1.      First take into account the opening cash balance, if any, for the beginning of the period for which the cash budget is to be prepared.
2.      Then Cash receipts from various sources are estimated. It may be from cash sales, cash collections from debtors/bills receivables, dividends, interest on investments, sale of assets, etc.
3.      The Cash payments for various disbursements are also estimated. It may be for cash purchases, payment to creditors/bills payable, payment to revenue and capital expenditure, creditors for expenses, etc.
4.      The estimated cash receipts are added to the opening cash balance, if any.
5.      The estimated cash payments are deducted from the above proceeds.
6.      The balance, if any, is the closing cash balance of the month concerned.
7.      The closing cash balance is taken as the opening cash balance of the following month.
8.      Then the process is repeatedly performed.
9.      If the closing balance of any month is negative i.e the estimated cash payments exceed estimated cash receipts, then overdraft facility may also be arranged suitably.

Example Problems:
1. ABC Company wishes to arrange overdraft facilities with its bankers during the period April to June, 2016 when it will be manufacturing mostly for stock. Prepare a cash budget for the above period from the following data, indicating the extent of the bank facilities the company will require at the end of each month.
            
         2014
           Sales
      Purchases
         Wages
         Feb
         1,80,000
      1,24,800
        12,000
         March
         1,92,000
      1,44,000
        14,000
        April
         1,08,000
      2,43,000
        11,000
        May
         1,74,000
      2,46,000
       10,000
        June     
         1,26,000
      2,68,000
       15,000

(b) 50 percent of credit sales are realised in the month following the sales and remaining 50 percent in the second month following. Creditors are paid in the month following the month of purchase. (c) Cash at Bank on 01.04.2016 (estimated) Rs 25,000.

Solution: