1. PREPARATION OF CASH BUDGET
Table 1.
Items of Cash Receipts and Payments and the Basis of Their Estimation.
Items
Basics of Estimation
Cash Sales
Estimated Sales and its division between cash and credit sales.
Collection of accounts receivable
Estimated sales, its division between cash and credit sales and collection pattern.
Interest and dividend receipts
Firm’s portfolio of securities and return expected from the portfolio.
Increase in loans/deposits and issue of securities
Financing plan.
Sale of assets
Proposed disposal of assets.
Cash purchases
Estimated purchases, its division between cash and credit purchases, and terms of credit purchases.
Continued…

2. Continued… Items Basics of Estimation Payment of purchases
Estimated purchases and its division between cash purchases and credit purchases.
Wages and Salaries
Manpower employed and wages and salaries structure.
Manufacturing expenses
Production plan.
General, administrative, and selling expenses
Administration and sales personnel and proposed sales promotion and distribution expenditure.
Capital equipment purchases
Capital expenditure budget and payment pattern associated with capital equipment purchases.
Repayment of loans and retirement of securities
Financial plan.

3. Problem on Cash Budgeting
Given below are the estimated details of Nagpur Company Ltd., from which you have to prepare the cash budget for three months – April, May and June,200X.
Particulars
Feb.
Rs.
Mar.
April
May
June
July
Sales
1,00,000
1,20,000
80,000
1,40,000
1,60,000
Purchases
60,000
50,000
30,000
70,000
40,000
Manufacturing Overheads
5,000
6,000
4,000
8,000
Wages
10,000
7,000
Administrative Salaries
12,000
11,000

4. Some more information is given below:
The company gives one month credit to its customers, 50% of the sales are on credit.
5% commission is given on all sales.
2% cash discount is given on cash sales.
60% of the purchases are on credit and the company gets two months credit from the suppliers.
Payment of the manufacturing overheads is normally delayed by 15 days.
The company will purchase furniture worth Rs. 40,000 on X with a down-payment of Rs. 20,000 and the remaining in two equal monthly installments in the immediately following months.
Advance tax of Rs.6,000 will have to be paid on X.
The company will sell old plant worth Rs. 25,000 for Rs. 18,000 on – X.
Ten employees are going to retire on 31st March and total gratuity due to them in May amounts to Rs. 1,10,000.
Bank overdraft facility is available.
Cash-in-hand on X is Rs.12,000.
You can make the necessary logical assumptions.

5. Nagpur Company Ltd Quarterly Cash Budget for April, May & June, 200X.
Particulars
April Rs.
May Rs.
June Rs.
Opening Balance (A)(i)
12,000
37,200
-74,200
Receipts(B)
Cash Sales(ii)
39,200
68,600
49,000
Collection of credit sales(iii)
60,000
40,000
70,000
Sales of old plant (iv) -
18,000
(A)+(B)
1,11,200
1,45,800
62,800
Less: Payments (C )
Cash purchases(v)
28,000
16,000
Payment of credit purchases (vi)
36,000
30,000
Manufacturing overheads (vii)
5,000
6,000
Wages(viii)
7,000
8,000
Administrative salaries (ix)
10,000
Sales commission (x)
4,000
Purchase of Furniture (xi)
20,000
Payment of advance tax (xii)
Payment of gratuity (xiii)
1,11,000
(C)
74,000
2,20,000
78,000
Closing Balance [(A+B)-C]
-15,200
Note : Roman numbers in Bracket indicate respective numbers of working notes.

6. Working Notes Continued
A cash budget is actually a combined statement of cash and bank accounts. Hence, the opening balance (on the 1st day of the month) and the closing balance (on the last day of the month) are the total of cash and bank balances. The closing balance of April will become the opening balance of May and so on. A negative balance means a bank overdraft.
50% of sales are for cash, i.e. 50% of the sales for a month will be collected in the same month. But 2% cash discount is given on cash sales, i.e. 98% of cash sales are actually collected. Example Rs. April Sales , % on Cash ,000 Less: 2% cash discount Net Cash Sales Collection 39,200
Continued

7. Remaining 50% of sales are on credit and the company gives
Remaining 50% of sales are on credit and the company gives one month credit to its customers, i.e. credit sales of April will be collected in May and so on. Hence, credit sales of Rs. 60,000 (50% of Rs. 1,20,000 for March are shown as collected in April and so on, Hence, credit sales of Rs. 60,000; 50% of Rs. 1,20,000) for March are shown as collected in April and so on. (III) It is assumed here that sales commission at 5% is given on respective month’s sales in the same month, irrespective of the collection of credit sales in the next month, i.e. 5% commission on April sales of Rs. 80,000 amount to Rs. 4,000 and it will be paid in April because sales of Rs. 80,000 are achieved in April.
Continued

8. (IV). As stated earlier, the cash budget has to show payments
(IV) As stated earlier, the cash budget has to show payments and receipts on account of daily business transactions or revenue payments and receipts and for purchase/sale of fixed or long-term assets, i.e. capital payments and receipts. The plant costing Rs. 25,000 will be sold for Rs.18,000 in June. The cash budget has to exhibit actual or net receipts or payments. Hence, Rs is shown as an item of receipt in June and not Rs. 25,000 or loss of Rs. 7, Rs.20,000 is paid for the furniture on the date of its purchase ( X) and the remaining Rs. 20,000 in two equal monthly installments, i,.e. Rs.10,000 in June and the remaining Rs. 10,000 in July.
Continued

9. (V). 40% of the purchases are for cash, i. e. these purchases will be
(V) 40% of the purchases are for cash, i.e. these purchases will be paid immediately in cash. 60% of the purchases are on credit for which the suppliers give two months’ credit, i.e. credit purchase of February will be paid in April and so on. Hence, 60% of the purchases worth Rs. 60,000 of February (Rs. 36,000) are shown as ‘payment of credit purchases’ in April (VI) Payment of the manufacturing overheads will be delayed by 15 days, i.e. the overheads of the first fortnight of April will be paid in its second fortnight and the second fortnight’s overheads will be paid in the first fortnight of May and so on. Hence, Rs. 3,000 due in March (second fortnight) + Rs. 2,000 due in April (First fortnight) will be paid in the first and second fortnights of April, respectively.
Continued

10. Continued
The total payments in April against manufacturing overheads amount to Rs. 5,000. The same rule applies to other months. Here it is assumed that the same amount of overhead is incurred every day in a month. (VII) Wages and administrative salaries for a month will be in the same month; as no information to the contrary is available. It is given in the problem that advance tax will be paid on 1st June and gratuity in May, so the payments are shown in the respective months.

11. ILLUSTRATION FOR PREPARATION OF CASH BUDGET
ABC Co. manufactures razor blades. Its estimated sales for the period January, 200X through June 200X are as follows: Rs. 1,00,000 per month from January through March and Rs. 1,20,000 per month from April through June. The sales for November & December of the previous year have been Rs. 1,00,000 each. Cash and credit sales are expected to be 20% & 80% respectively. The receivables from credit sales are expected to be collected as follows: 50% of receivables on an average one month from the date of sale & the balance 50% of receivables, on an average two months from the date of sale. No bad debt losses are expected to occur. Other anticipated receipts are: (1) Rs from the sale of a machine in March & (ii) Rs interest on securities in June.
Given the information tabulate the forecasted each receipts.
Continued…

12. Continued… Continued… Now consider the forecast of cash payments:
ABC Co. plans to purchase the material worth Rs. 40,000 in January & February and material worth Rs. 48,000 in March & April. The payments for these purchases are made approximately a month after the purchase.
The purchases for the month of December of the previous year have been Rs. 40,000 for which payments will be made in January 200X.
Miscellaneous cash purchases of Rs per month are planned for January through June.
Manufacturing expenses are expected to be Rs. 20,000/- month.
Continued…

13. Continued… Continued…
General administration and selling expenses are expected to be Rs. 10,000- month.
Dividend & Tax payment of Rs. 20,000 each is expected to be scheduled in June 200X.
A machine worth Rs. 50,000 is proposed to be purchased on cash in March 200X
Tabulate the proposed cash payments.
Summaries the two tables to calculate the cash surplus/ deficit month wise for ABC co.
Assume that the cash balance on 1st January 200X is Rs. 22,000 and the minimum cash balance required by the firm is Rs, 20,000.
Continued…

14. Table 2: Forecast of Cash Receipts Rs.
Jan
Feb.
Mar.
Apr.
May.
Jun.
1. Sales
1,00,000
1,20,000
2. Credit Sales
80,000
96,000
3. Collection of Accounts Receivables
88,000
4. Cash Sales
20,000
24,000
5. Receipt Sales of Equipment
5,000
6. Interest
2,000
Total Cash Receipts
( )
1,05,000
1,04,000
1,12,000
1,22,000

15. Table 3: Forecast of Cash Payments Rs.
Jan
Feb.
Mar.
Apr.
May.
Jun.
1. Material Purchase
40,000
48,000
2. Credit Material Purchase
3. Payment of Accounts Payable
4. Misc.Cash Purchases
2,000
5. Wages
15,000
6. Manufacturing expenses
20,000
7. General Administration and Selling Expenses
10,000
8. Dividend …
9. Tax
10. Capital Expenditure
50,000
Total Cash Payments
( )
87,000
1,37,000
95,000
1,35,000

16. Table 4: Summary Cash Forecast Rs.
Jan
Feb.
Mar.
Apr.
May.
Jun.
1. Opening Balance
22,000
2. Receipts
1,00,000
1,05,000
1,04,000
1,12,000
1,22,000
3. Payments
87,000
1,37,000
95,000
1,35,000
4. Net Cash Flow (3-4)
13,000
(32,000)
9,000
17,000
(13,000)
5. Cumulative Net Cash Flow
26,000
(6,000)
3,000
20,000
7,000
6. Opening Cash Balance Cumulative Net Cash Flow (1+5)
35,000
48,000
16,000
25,000
42,000
29,000
7. Minimum Cash Balance Required
8. Surplus or Deficit in Relation to the Minimum Cash Balance Required (6-7)
15,000
28,000
(4,000)
5,000

17. Deferring a position of the payment for the capital asset to April &
The management can avoid this shortage by adopting one or more of the following means:
(i) Postponement of asset acquisition to April,
Deferring a position of the payment for the capital asset to April &
Resorting to short-term borrowing for the month of March.
Other alternatives like:
Delaying payment to suppliers of material and
Expediting the collection of receivables are also available.
Continued

18. The receipt and payments method of cash forecasting is used commonly due to two advantages:
It provides a complete picture of expected cash flows; and
It is a sound vehicle for exercising control over day to day transactions. However this method has following drawbacks:
Its reliability is impaired by delays in collection or sudden demand for large payments and other similar factors.
It fails to provide a clean picture of important changes in the company’s working capital movement, especially those relating to inventories and receivables.
This method of cash forecasting, resembling the funds flow statement, seeks to estimate the firm’s need for cash at some future date and indicates whether this need can be met with internal resources or not:
Continued

19. Table 5: A format for the adjusted Net Income Method
Year1
Year2
Year3
Year4
Year5
Source
Net Income after taxes
Non-Cash Charges
(Depreciation, Amortisation Etc.)
Increase in Borrowings
Sales of Equity Shares
Miscellaneous
Uses
Capital Expenditure
Increase in Current Assets
Repayment of Borrowings
Dividend Payment
Surplus / Deficit
Opening Cash Balance
Closing Cash Balance

20. Table 6: Daily Cash Report
Opening Balance
Receipts
Cash Sales
Collection of Accounts receivables
Loans
Others …
Payments
Cash Purchases
Payments to Creditors
Repayment of Loans
Other Payments
Difference Between Receipts and Payments
Closing Balance

21. Table 7: Daily Treasury Report
Today
This month to Date
Cash
Opening Balance
Receipts
Payments
Closing Balance …
Marketable Securities
Purchases
Sales
Accounts Receivables (Debtors)
Bills Raised
Cash Receipts
Accounts Payable
Bills Received
Cash Payments
Net Treasury Position
At the Beginning
At the End
Tab on Important Items
Bank Loans
Dividends
Long Terms Loans
Income-Tax
Others

22. Playing The Float
To illustrate the game of ‘Playing the float’, let us consider an example.
ABC company issues cheques of Rs. 20,000 daily and it takes 6 days for these cheques to be cleared.
ABC receives cheques of Rs.20,000 daily and, thanks to its expeditious collection, it takes 4 days for these cheques to be realised.
Assuming that there is zero balance to begin with, the balance in the books of the firm and the books of the bank will be as shown in Table 8. From this table we find that a steady state is reached on the seventh day. From thereon the closing balance in the firm’s books would be zero and the closing balance in the bank’s books would be Rs. 40,000.
This means that in the steady state situation the firm has a ‘net float’ of Rs. 40,000 and a part of this may be used.

23. Table 8: Balance in the books of the Firm and the books of the Bank
Day
Books of the Firm
Books of the Bank 1.
Balance decreased by Rs. 20,000 (Cheques issued and increased by Rs. 20,000 (Cheque deposited). The net effect is nil, so the closing balance is zero
Balance of the firm is neither increased nor decreased. Hence the closing balance is zero. 2.
- do - 3. 4. 5.
Balance of the firm is increased by Rs. 20,000 (cheques deposited on the first day are credited). The closing balance is Rs. 20,000 6.
- do –
Balance of the firm is increased by Rs. 20,000 (Cheques deposited on the second day are credited). The closing balance is Rs. 40,000 7.
Balance of the firm is increased by Rs. 20,000 (Cheques deposited on the third are credited) and decreased by Rs. 20,000 (Cheques issued on the first day are paid) The closing balance is Rs. 40,000. From this day onward each day Rs. 20,000 is credited to the firm’s account and Rs. 20,000 is debited to the firms account, and the closing balance remains at Rs. 40,000.