Mada za sehemu hiiCost AccountingMada 4
Cash budget is a detailed estimates of cash flows (cash receipts and disbursements) during the budget period. The cash budget presents the expected cash inflows and outflows for a specific period. It helps management to maintain adequate liquidity position of the organization and keep cash balances in reasonable relationship to its needs. Therefore, it is necessary to co-ordinate the cash budget with other functional budgets. On the other hand, it enables the management to make optimal use of the idle cash by investing in short term financial assets and avoid possible cash shortages.
Cash budgets can be prepared monthly, weekly or even daily depending upon the company's requirements. One needs to consider about cash receipts expected to be received during the budget period, including borrowings from lenders and cash collected from debtors. All functional budgets must be considered, including sales budget, materials budget, capital expenditure budget etc. Projected cash payments must be deducted from the projected cash available to determine the net cash flow for the budget period. This include payments to creditors, loan repayments and other daily operating expenses. Non-cash expenses such as depreciation and discounts are ignored
KILITEX Ltd., a company dealing with textiles is expecting to have a cash balance of TZS 25,000,000 as at 1st April, 2021. The finance manager needs to know the cash position of the organization for three months and has asked you to prepare a cash budget for three months from April to June, 2021 using the following information:
Monthly Financial Data
| Month | Sales (TZS '000') | Purchase (TZS '000') | Wages (TZS '000') | Expenses (TZS '000') |
|---|---|---|---|---|
| February | 70,000 | 40,000 | 8,000 | 6,000 |
| March | 80,000 | 50,000 | 8,000 | 7,000 |
| April | 92,000 | 52,000 | 9,000 | 7,000 |
| May | 100,000 | 60,000 | 10,000 | 8,000 |
| June | 120,000 | 55,000 | 12,000 | 9,000 |
Additional information:
- Credit period allowed by suppliers is two months.
- 75% of sales is for credit, and the customers are allowed one month of credit.
- Delay in payment of wages and expenses is one month.
- Income Tax TZS 25,000,000 is to be paid in June, 2021
KILITEX Ltd. Cash budget for the period of April to June, 2021
Cash Flow Statement for 2021
| Particulars | April, 2021 (TZS '000') | May, 2021 (TZS '000') | June, 2021 (TZS '000') | Total 2021 (TZS '000') |
|---|---|---|---|---|
| Cash balance at beginning | 25,000 | 53,000 | 81,000 | 25,000 |
| Cash receipts: | ||||
| Cash sales | 23,000 | 69,000 | 75,000 | 78,000 |
| Debtors | 60,000 | 147,000 | 186,000 | 204,000 |
| Total cash receipts | 108,000 | 147,000 | 186,000 | 307,000 |
| Cash payments: | ||||
| Creditors | (40,000) | (50,000) | (52,000) | (142,000) |
| Wages | (8,000) | (9,000) | (10,000) | (27,000) |
| Expenses | (7,000) | (7,000) | (8,000) | (22,000) |
| Income Tax | (25,000) | |||
| Cash balance at the end | 53,000 | 81,000 | 91,000 | 91,000 |
Note: The opening balance at the beginning of April is the same as the beginning balance for the quarter.
April, 2021
Cash sales = 25% of TZS 92,000,000 (cash sales of April collected)
Debtors = 75% of TZS 80,000,000 (March credit sales collected)
Creditors = TZS 40,000,000 (credit purchase relating to February paid)
Wages = TZS 8,000,000 (March wages paid)
Expenses = TZS 7,000,000 (March expense paid)
The following are considered the importance of preparing a cash budget in any organisation:
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Monitoring and evaluation of performance: For example if the company has TZS 12,800,000 of outstanding receivables at the end of December as compared to the TZS 9,700,000 that was budgeted, at similar sales volume, then this would indicate that customers are taking longer to pay their dues beyond the agreed terms. This in turn may indicate that the person responsible for debt collection is less efficient than they should be.
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Helpful in planning: Cash budget helps planning for the most efficient use of cash. It points out cash surplus or deficiency at selected point of time. This enables the management to arrange for possible solutions to the deficiency before time or to plan for investing surplus money in profitable ventures without threat to liquidity.
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Forecasting the future needs: Cash budget forecasts the future needs of funds, its time and the amount well in advance. It, thus, helps planning for raising the required funds through the most relevant sources at reasonable terms and costs.
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Maintenance of reasonable cash balance: Cash is the basis of liquidity of the enterprise. Cash budget helps in maintaining the liquidity. It suggests adequate cash balance for expected requirements and a fair margin for the contingencies, not too much and not too little.
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Controlling cash expenditure: Cash budget acts as a controlling device. The expenses of various departments in the firm can best be controlled so as not to exceed the budgeted amount, and not spending outside the budgeted activities.
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Sound dividend policy: Cash budget also helps the management of companies to properly plan for cash dividend to shareholders, consistent with the liquidity position of the firm. This in turn helps to have a sound consistent dividend policy
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