The remaining budgets found in the master budget are the financial budgets. The typical financial budgets prepared are the cash budget, the budgeted balance sheet, the budgeted statement of cash flows, and the budget for capital expenditures. While the master budget is a plan for one year, the capital expenditures budget is a financial plan outlining the expected acquisition of long-term assets and typically covers a number of years. . Details on the budgeted statement of cash flows are appropriately reserved for another course. Accordingly, only the cash budget and the budgeted balance sheet will be illustrated here.
The Cash Budget
Knowledge of cash flows is critical to managing a business. Often, a business is successful in producing and selling a product but fails because of timing problems associated with cash inflows and outflows. By knowing when cash deficiencies and surpluses are likely to occur, a manager can plan to borrow cash when needed and to repay the loans during periods of excess cash. Bank loan officers use a company’s cash budget to document the need for cash, as well as the company’s ability to repay. Because cash flow is the lifeblood of an organization, the cash budget is one of the most important budgets in the master budget.
Components of the Cash Budget
The cash budget is the detailed plan that shows all expected sources and uses of cash. The cash budget, illustrated in Exhibit 8-4, has the following five main sections:
The Cash Budget
Knowledge of cash flows is critical to managing a business. Often, a business is successful in producing and selling a product but fails because of timing problems associated with cash inflows and outflows. By knowing when cash deficiencies and surpluses are likely to occur, a manager can plan to borrow cash when needed and to repay the loans during periods of excess cash. Bank loan officers use a company’s cash budget to document the need for cash, as well as the company’s ability to repay. Because cash flow is the lifeblood of an organization, the cash budget is one of the most important budgets in the master budget.
Components of the Cash Budget
The cash budget is the detailed plan that shows all expected sources and uses of cash. The cash budget, illustrated in Exhibit 8-4, has the following five main sections:
1. Total cash available
2. Cash disbursements
3. Cash excess or deficiency
4. Financing
5. Cash balance
The cash available section consists of the beginning cash balance and the expected cash receipts. Expected cash receipts include all sources of cash for the period being considered. The principal source of cash is from sales. Because a significant proportion of sales is usually on account, a major task of an organization is to determine the pattern of collection for its accounts receivable. If a company has been in business for a while, it can use past experience to create an accounts receivable aging schedule. In other words, the company can determine, on average, what percentages of its accounts receivable are paid in the months following the sales. The cash disbursements section lists all planned cash outlays for the period except for interest payments on short-term loans (these payments appear in the financing section). All expenses not resulting in a cash outlay are excluded from the list. (Depreciation, for example, is never included in the disbursements section.)
The cash excess or deficiency section compares the cash available with the cash needed. Cash needed includes the total cash disbursements plus the minimum cash balance required by company policy. The minimum cash balance is simply the lowest amount of cash on hand that the firm finds acceptable. Consider your own checking account. You probably try to keep at least some cash in the account, perhaps because a minimum balance avoids service charges or because it allows you to make an unplanned purchase. Similarly, companies also require minimum cash balances. The amount varies from firm to firm and is determined by each company’s particular needsand policies. If the total cash available is less than the cash needs, a deficiency exists. In such a case, a short-term loan will be needed. On the other hand, with a cash excess (cash available is greater than the firm’s cash needs), the firm has the ability to repay loans and perhaps make some temporary investments.
The financing section of the cash budget consists of borrowings and repayments. If there is a deficiency, the financing section shows the necessary amount to be borrowed. When excess cash is available, the financing section shows planned repayments, including interest. The final section of the cash budget is the planned ending cash balance. Remember that the minimum cash balance was subtracted to find the cash excess or deficiency.Also read static budgets versus flexible budgets
2. Cash disbursements
3. Cash excess or deficiency
4. Financing
5. Cash balance
The cash available section consists of the beginning cash balance and the expected cash receipts. Expected cash receipts include all sources of cash for the period being considered. The principal source of cash is from sales. Because a significant proportion of sales is usually on account, a major task of an organization is to determine the pattern of collection for its accounts receivable. If a company has been in business for a while, it can use past experience to create an accounts receivable aging schedule. In other words, the company can determine, on average, what percentages of its accounts receivable are paid in the months following the sales. The cash disbursements section lists all planned cash outlays for the period except for interest payments on short-term loans (these payments appear in the financing section). All expenses not resulting in a cash outlay are excluded from the list. (Depreciation, for example, is never included in the disbursements section.)
The cash excess or deficiency section compares the cash available with the cash needed. Cash needed includes the total cash disbursements plus the minimum cash balance required by company policy. The minimum cash balance is simply the lowest amount of cash on hand that the firm finds acceptable. Consider your own checking account. You probably try to keep at least some cash in the account, perhaps because a minimum balance avoids service charges or because it allows you to make an unplanned purchase. Similarly, companies also require minimum cash balances. The amount varies from firm to firm and is determined by each company’s particular needsand policies. If the total cash available is less than the cash needs, a deficiency exists. In such a case, a short-term loan will be needed. On the other hand, with a cash excess (cash available is greater than the firm’s cash needs), the firm has the ability to repay loans and perhaps make some temporary investments.
The financing section of the cash budget consists of borrowings and repayments. If there is a deficiency, the financing section shows the necessary amount to be borrowed. When excess cash is available, the financing section shows planned repayments, including interest. The final section of the cash budget is the planned ending cash balance. Remember that the minimum cash balance was subtracted to find the cash excess or deficiency.Also read static budgets versus flexible budgets
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