Managing Cash Budgets

The Cash Budget is a detailed plan showing how cash resources will be acquired and used over some specified time period. Once the operating budgets (sales, production, and so on) have been established, the cash budget and other financial budgets can be prepared. From the above representation, it is clear that all of the operating budgets have an impact of some type on the cash budget.

Remember that the cash flow projection or budget reflects only transactions that result in actual cash inflows or outflows.

Depreciation is not a cash flow transaction and should not be included.

Credit sales (debtors) are not cash flow transactions and should not be included. The eventual cash collection from debtors, however, must be included as and when they occur.

Credit purchases (creditors) are not a cash flow transaction and should not be included. The eventual cash payment of creditors, however, must be included as and when they occur.

The cash flow projection is not an Income Statement; purchases of fixed assets must be included. If bought for cash the full cash payment must be included when payment is expected to take place. If purchased on credit the instalments must be included as and when they will take place.

Provisions are not cash flow transactions. Provision for taxes or dividends must not be included. Only actual dividends or tax paid must be included in the expected period of payment.

Click here to view a video that explains the depreciation in cash flow.

Note that the collection of cash from debtors does not necessarily take place in the month after the sale has been made, but could be several months later, if at all (bad debts). This lagging of collections needs to be taken into account when preparing a cash budget. A similar lagging can also be found in the payment of creditors.

Example:

Cash strapped Ltd.’s expected sales, all on credit, for June, July and August are R210 000, R250 000 and R240 000 respectively. Actual sales for March, April and May were R140 000, R180 000 and R190 000.

Experience has shown that 75% of a month's sales are collected in the following month, 15% still a month later, while the rest are never collected at all (bad debts).

Actual/expected sales:

Cash sales: none: