Preparation of cash budget – Methods :

There are three methods by which a cash budget is prepared. They are

1. Receipts and Payments Method

2. Adjusted Profit and Loss Account Method or Cash Flow Method

3. Balance Sheet Method

However, among the three methods only “Receipts and Payments Method” alone is discussed in this chapter.

Receipts and Payments Method

Under this method Cash budget projects the concern’s cash receipts and payments for a certain period (budget period). It has two basic components:

1. Estimate of cash receipts and

2. Estimate of cash payments

Cash Receipts include:

* Cash sales
* Cash receivable from customers
* Business receipts like interest, commission, dividend etc
* Sale of assets
* Proceeds from issue of shares/debentures
* Loans borrowed

Cash Payments include:

* Cash purchases
* Cash payable to suppliers
* Business expenses like wages, office expenses, selling expenses, etc.

* Payment of interest, income tax, dividend etc.
* Purchase of assets
* Redemption of shares/debentures
* Repayment of loans

Steps in the preparation of cash budget

Step 1 → Take opening cash balance
Step 2 → Add the estimated total cash receipts for the month
Step 3 → Calculate the total cash available for the month
Step 4 → Less the estimated total cash payments during the month
Step 5 → Calculate the closing cash balance

Format:

Cash Budget for the period ——————

Particulars	Month 1 Rs.	Month 2 Rs.	Month 3 Rs.
Opening Cash Balance
Add: Estimated cash receipts :
Cash sales
Cash receivable from customers
Business receipts like Interest, commission, dividend etc
Sale of assets
Loans borrowed
Proceeds from issue of shares/debentures
Total cash available during the month

Less: Estimated cash payments :
Cash purchases
Payable to suppliers
Business expenses – wages, office expenses, selling expenses, etc
Business Payments – Interest paid, income tax, dividend etc.
Purchase of assets
Repayment of loans
Redemption of shares/debentures
Total cash payments during the month
Closing cash balance

 

The closing cash balance of the current month will be the opening cash balance of the next month.

Illustration : 

From the following information, prepare cash budget for June 2005.

 

Particulars	Rs.
Cash in hand 1.6.2005	10,000
Cash purchases for June, 2005	70,000
Cash sales for June, 2005	1,00,000
Interest payable in June, 2005	1,000
Purchase of Office furniture in June, 2005	2,500

 

Solution:

Cash Budget for the month June, 2005

 

Particulars	Rs.
Opening cash balance	10,000
Add: Estimated receipts:
Cash Sales	1,00,000
Total cash available during the month	1,10,000
Less: Estimated cash payments:
Cash purchases	70,000
Interest paid	1,000
Purchase of furniture	2,500
Total cash payments	73,500
Closing cash balance	36,500

 

Illustration :

Prepare a cash budget for the months of June, July, August 2004 from the following information:

1) Opening cash balance in June Rs.7,000.

2) Cash sales for June Rs.20,000; July Rs.30,000 and August Rs.40,000.

3) Wages payable Rs.6,000 every month.

4) Interest receivable Rs.500 in the month of August.

5) Purchase of furniture for Rs.16,000 in July.

6) Cash Purchases for June Rs.10,000; July Rs.9,000 and August Rs.14,000.

Solution:

Cash Budget for the period June to August 2004

Particulars	June Rs.	July Rs.	August Rs.
Opening cash balance	7,000	11,000	10,000
Add: Estimated cash receipts :
Cash sales	20,000	30,000	40,000
Interest	—	—	500
Total cash available during the month	27,000	41,000	50,500
Less: Estimated cash payments :
Cash purchases	10,000	9,000	14,000
Payment of wages	6,000	6,000	6,000
Purchase of furniture	—	16,000	—
Total cash payments during the month	16,000	31,000	20,000
Closing cash balance	11,000	10,000	30,500

 

Note : The closing cash balance in June will be the opening cash balance in July.

Illustration : 

From the following information, prepare a budget for three months from October 2003.

1) Opening cash balance in October Rs.3000.

2) Cash Sales October: Rs.25,000; November : Rs.20,000; December : Rs.15,000.

3) Credit purchases – September Rs.10,000; October Rs.12,000; November Rs.14,000; December Rs.16,000. The period of credit allowed by suppliers is one month.

4) Dividend to be received in December Rs.4,000.

5) Advance tax Rs.3,000 payable in October.

6) Sale of an old asset for Rs.12,000 during November.

Solution:

Cash Budget for the period October to December 2003

Particulars	October  Rs.	November  Rs.	Decembe Rs.
Opening cash balance	3,000	15,000	35,000
Add: Estimated cash receipts :
Cash sales	25,000	20,000	15,000
Dividend	—	—	4,000
Sale of asset	—	12,000	—
Total cash available during the month	28,000	47,000	54,000
Less: Estimated cash payments :
Payment to suppliers	10,000	12,000	14,000
Advance income tax payable	3,000	—	—
Total cash payments during themonth	13,000	12,000	14,000
Closing cash balance	15,000	35,000	40,000

 

Note: The suppliers of goods have given one month credit, so the purchases made in September will be paid in October and those
purchases in October will be paid in November, those purchases in November will be paid in December.

Illustration :

From the following information, prepare a cash budget for April, May and June 2005.

Month	Credit Sales Rs.	Credit Purchases Rs.	Office Expenses Rs.
February	45,000	30,000	8,000
March	55,000	25,000	7,000
April	60,000	20,000	7,000
May	60,000	40,000	9,000
June	65,000	40,000	9,000

 

1) Opening cash balance Rs.5000.
2) Credit allowed by suppliers is two months.
3) Credit allowed to customers is one month.
4) Office expenses are payable in the same month
5) Dividend Rs.1000 is receivable in April.
6) Interest payable in May Rs.1,800.

 

Solution:

 

Cash Budget for the period April to June, 2005

Particulars	April Rs.	May  Rs.	June Rs.
Opening cash balance		24,000	48,200
Add: Estimated cash receipts :
Cash receivable from customers	55,000	60,000	60,000
Dividend	1,000	—	—
Total cash available during the month	61000	84,000	1,08,200
Less: Estimated cash payments :
Payments to suppliers	30,000	25,000	20,000
Office expenses	7,000	9,000	9,000
Interest payable	—	1,800	—
Total cash payments during the month	37,000	35,800	29,000
Closing cash balance	24,000	48,200	79,200

 

Illustration : 

Prepare a cash budget for the months – March, April and May 2005 from the following information

 

Month	Credit Sales Rs.	Credit Purchase Rs.	Wages Rs.	Misc. Expenses Rs.	Office Expenses Rs.
January	60,000	36,000	9,000	4,000	2,000
February	82,000	38,000	8,000	3,000	1,500
March	84,000	33,000	10,000	4,500	2,500
April	78,000	35,000	8,500	3,500	2,000
May	56,000	39,000	9,500	4,000	1,000

 

Additional information :

1) Opening cash balance Rs.8,000.

2) Period of credit allowed to customers one month

3) Period of credit allowed by suppliers two months.

4) Wages and miscellaneous expenses are payable in the same month.

5) Lag in payment of office expenses is one month

 

Solution:

Cash Budget for the period March, April & May 2005

Particulars	March Rs.	April Rs.	May Rs.
Opening cash balance	8,000	38,000	69,500
Add: Estimated cash receipts :
Cash receivable from customers	82,000	84,000	78,000
Total cash available during the month	90,000	1,22,000	1,47,500
Less: Estimated cash payments :
Payments to suppliers	36,000	38,000	33,000
Wages	10,000	8,500	9,500
Office expenses	1,500	2,500	2,000
Miscellaneous expenses	4,500	3,500	4,000
Total cash payments during the month	52,000	52,500	48,500
Closing cash balance	38,000	69,500	99,000

 

Notes:

1. The closing cash balance in March will be the opening balance in April and so on.

2. Since credit allowed to customers is one month, the amount of credit sales in February is collected in March and so on.

3. Since credit allowed by suppliers is two months credit purchases of January is paid in March and so on.

4. Office expenses are paid in the next month, so office expenses for February will be paid in March and so on.