Chapter 6 Cash Budgets

Cash Budgets Forecast the business’s ability to pay its debts as and when they fall due. Enable predicted borrowing to be arranged ahead of time. Allows planning for investment of surplus funds. Business Budgeting - Chapter 6

Budgets required The following sub budgets may need to be prepared first in order to complete the Cash Budget Accounts Receivable Collections Budget. Cash Receipts Budget. Cash Payments Budget. Business Budgeting - Chapter 6

Accounts Receivable Budget An Accounts Receivable Budget is a schedule of expected receipts from debtors for a period. Over time, the receipts of cash from accounts receivable will follow a pattern, providing a reliable basis to prepare a budget Business Budgeting - Chapter 6

Accounts Receivable Collections Budget Example 1 All sales are made on credit and the expected pattern of receipts is: 50% pay in the month of sale 50% pay in the following month GST is accounted for on a cash basis. Required: Prepare an accounts receivable collections budget for January, February and March, showing GST collected separately. Business Budgeting - Chapter 6

Accounts Receivable Collections Budget Solution Business Budgeting - Chapter 6

Accounts Receivable Collections Budget Example 2: With Discount All sales are made on credit and the expected pattern of receipts is: • 60% pay in the month following the month of sale and receive a discount of 4% • 40% pay in the second month after sale. Required: Prepare an accounts receivable collections budget for January, February and March, showing GST collected separately. Business Budgeting - Chapter 6

Accounts Receivable Collections Budget Solution Business Budgeting - Chapter 6

Cash receipts budget A cash receipts budget is a forecast of all expected receipts of a business for a period. Example 3 Cash Receipts Budget- with discount The White Bay Paper Company sells paper products wholesale. The company is GST registered and accounts for GST on a cash basis. Half of their sales are for cash, with customers earning a 5% cash discount. Account customers normally pay as follows: • 50% pay in the month after sale and earn a discount of 2% • 40% pay in the second month after sale • 10% pay in the third month after sale At the end of June, the balance in accounts receivable is $37,000. Of this amount $3,000 is from April sales, $12,000 is from May sales and $22,000 is from June sales. Expected sales ( GST excluded ) for the next three months are: Required: Prepare a cash receipts budget for the period from July to September. Business Budgeting - Chapter 6

Cash receipts budget Solution: Business Budgeting - Chapter 6

Cash receipts budget NOTES: 1. The first table, Accounts Receivable Balances, uses balances at July 1 to determine total credit sales for the preceding months. Once the percentage owing has been calculated, (100% – % paid) total credit sales = Amount owing divided by the percentage it represents. Therefore credit sales for April = $3,000/0.1 = $30,000. 2. The first line of the Cash Receipts table is “Credit Sales”. Cash sales are added after collections from debtors. Business Budgeting - Chapter 6

Cash Payments budget A cash payments budget is a forecast of all expected payments of a business for a period. Example 3 Cash Payments Budget- No Discount Bondy Corp sales for the next four months are expected to be as follows: All Inventory is sold at a mark-up of 75%. Inventory at the beginning of each month is required to be 25% of usage for the month. All accounts payable are paid in the month following purchase, with all purchases attracting a discount of 2.50%. The balance in accounts payable at the end of December is $28,000 ( + 10% GST) Bondy Corp is GST registered and accounts for GST on a cash basis. Business Budgeting - Chapter 6

Cash Payments budget Example 3 Continued Operating expenses are as follows: The net GST collected in the December quarter and payable in January is $2,200. In addition to the above expenses an income tax bill of $4,500 is payable in March. Required: Prepare a cash payments budget for January, February and March. Business Budgeting - Chapter 6

Cash Payments Budget Solution Business Budgeting - Chapter 6

Cash Payments Budget Solution Business Budgeting - Chapter 6

Preparing the Cash Budget Opening Cash Balance + Receipts = Cash Available - Payments Closing Cash Balance Business Budgeting - Chapter 6

GST and Cash Budgets GST must be incorporated into cash budgets, as GST Collected on sales less GST Paid on purchases must be remitted to the ATO The BAS must be completed on a monthly or quarterly basis, depending on the size of the business. GST Collected and Paid is reported to the ATO on either a cash or accrual basis. Business Budgeting - Chapter 6

Reporting GST on a Cash Basis The GST Collected is reported when payment is received from a customer. The GST Paid is reported when payments are made to suppliers. Publication Title: Business Budgeting Chapter: Chapter 6

Reporting GST on an Accrual Basis The GST Collected is reported when the invoice is issued to a customer. The GST Paid is reported when the invoice is issued from a supplier. Publication Title: Business Budgeting Chapter: Chapter 6

Example Cash vs Accrual Basis Todd sold $440 of clothes to Hubert on 27 June on account. Hubert paid Todd on 3 July. When will Todd report the $40 GST Collected to the ATO? • If reporting on an Accrual basis, Todd will report the GST Collected in June, when the sale was made and invoice issued. • If reporting on a Cash basis, Todd will report the GST Collected in July, when the payment was received from the Account Receivable. Publication Title: Business Budgeting Chapter: Chapter 6

Cash vs Accrual Basis Remember, figures appearing on an Income Statement are shown net of GST. Cash amounts being paid or received include GST where applicable. Publication Title: Business Budgeting Chapter: Chapter 6

Cash Budget- Example Business Budgeting - Chapter 6

Cash Budget- Solution Publication Title: Business Budgeting Chapter: Chapter 6

Desired Cash Balance In some cases management may require that the cash balance be a certain amount or above a certain amount. Example: The following cash budget is supplied by the local newsagency, which requires a closing cash balance of at least $8,000. Business Budgeting - Chapter 6

Desired Cash Balance Solution Business Budgeting - Chapter 6