Management Accounting:
A Road of Discovery
Management Accounting:
A Road of Discovery
James T. Mackey
Michael F. Thomas
Presentations by:
Roderick S. Barclay
Texas A&M University - Commerce
James T. Mackey
California State University - Sacramento
© 2000 South-Western College Publishing
Chapter 4
How much cash can we take?
Developing cash budgets
from proformas
Key Learning Objectives
• Explain why proforma income
statements and CVP analysis
have to be translated into a
cash budget.
• Discuss the usefulness of
budgets when cash inflows are
known.
• Prepare a schedule for cash
collections from sales.
• Develop operating budgets
(schedules for purchases, labor,
overhead, and operating
expenses).
• Create a monthly cash budget.
• Describe how cash budgeting
can affect motivation and
control.
7. [Appendix A] Comment on
spreadsheet usefulness in
budgeting.
Profit and Cashflows are not the Same
Thing
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Profit = Revenues less Expenses.
Cashflow = Deposits into and withdrawals from our
bank account.
Revenue is an increase in our assets attributed to our
sales activities.
Expenses are reductions in assets to earn revenue —
and include noncash and cash expenses.
Matching means we match revenue and expenses in
the same period to determine our profit — the
amount by which revenue exceeds expenses.
The timing of cashflows does not necessarily match
the recognition of revenue.
Why Plan? Cash and Operational Budgets
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Limited resources — we need to allocate our
resources to create the greatest value.
Uncertainty — we need to assure we have
enough cash to pay our bills when due. (This
is why we prepare cash budgets.)
Communication — we need to understand
what we can accomplish and communicate to
our employees what we expect.
Evaluation — we need to set performance
expectations and measure productivity.
The Cash Management Process
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Estimate cash inflows.
Plan expenditures (cash outflows).
Limit spending to budget (Cash control).
Compare budgeted to actual cashflows
(evaluation).
Planning Motivates Control Through
Evaluation
Planning
Control
Evaluation
Strategic plan to define Motivate daily decisions, Balanced scorecard to
what we want to
communication, and
evaluate the success of
accomplish and how we
coordination through
the strategic plan.2
are going to do it.1
knowing actual
Variance reporting for
performance will be
Cash budget to identify
operations and cash
compared to plan and
the timing of cash
management.3
used as a basis for
receipts and payments
rewards.
necessary for the
strategic plan to work.
•Control means getting people to do what you want them to do. The plan
allows managers to understand what is possible and communicate to
others. The budget is a basis for control.
Brian’s College Dilemma — Send Cash,
Hurry!
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Brian’s cash budget with limited
uncertainty.
See Exhibit 4-3, p. 101.
Brian has a timing problem with his
cash flow.
Brian’s Next Try at a Budget
Cash-ins
Pell grant
State university grant
Scholarships
Student loans
Total financial aid
From Mom and Dad’s
payroll
Cash-outs
Tuition
Books
School fees
Miscellaneous
Living expenses
Ending Cash Balance
September
$1,300
800
500
1,700
$4,300
740
(1,200)
(500)
(100)
(71)
(1,150)
$2,020
Note: See
Exhibit 4-4, p.
104, for the
remainder of
Brian’s Second
Draft of his
budget.
Budgeting in an Uncertain Business World
— Solvency Management
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Once we have taken care of the internal
management issues, we must forecast the
flow of cash needed to operate as planned.
This will likely take several iterations.
We must balance the outward flow of cash
with the inward flow of cash.
We must take into account the timing of the
cash inflows and outflows.
The Cash-to-Cash Operating Cycle for
Multree’s Standard Homes
Cash-outs
Cash-ins
Month 1
Month 2
Make sale and collect a
40% down payment.

Buy all of the direct
materials; pay 1/2 this
month.
 Pay for 1/3 of the direct
labor and variable overhead.
 Pay monthly fixed
overhead.
 Pay sales commissions.

Pay for ½ of direct
materials.
Pay for 1/3 of the direct
labor and variable overhead.
 Pay monthly fixed
overhead.

The Cash-to-Cash Operating Cycle for
Multree’s Standard Homes (Continued)
Cash-outs
Cash-ins
Month 3
Pay for 1/3 of the direct
labor and variable overhead.
 Pay monthly fixed
overhead.

Month 4

Deliver house and collect
50% of sales price.
Month 5

Collect the last 10% of
the sales price.
Pay monthly fixed
overhead.
 Pay shipping cost.

Pay monthly fixed
overhead.
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Note that each transaction creates a ripple effect of cashflow over
many periods. An illustration is supplied as Exhibit 4-7, p. 109.
Factors Influencing the Need for
Budgeting & Planning
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Factors increasing the value of
cash budgeting
Scarce or expensive resources;
money, materials, labor, etc.
Long manufacturing or
delivery times.
High operating uncertainty;
unreliable suppliers, unskilled
or unmotivated workers,
poorly maintained machinery,
etc.
Complexity and variety; many
different types of products or
services, customers, or
activities.
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Factors decreasing the value of
cash budgeting
Abundance of resources; lots of
money in the bank, many
available workers, highly
qualified workers, plenty of
materials, etc.
Short cash-to-cash operating
cycle; e.g. a grocery store.
Highly reliable operating
environment.
Little variety of products,
customers, or activities.
Budgeting Cashflows From Sales
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Timing Differences — cashflows lag sales.
Trends and cycles — Sales vary from month to
month.
To help understand this process, we use the following
several slides to illustrate and discuss the operations
of Carrie’s Snowblowers.
Month
October
November
December
January
February
March
Sales
$ 40,000
100,000
300,000
100,000
40,000
2,000
Unit Sales
200
500
1,500
500
200
10
Carrie’s Snowblowers
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
(Continued)
30% of all sales are for cash, 60% of receivables are collected in
the month following the sale, 35% are collected two months after
the purchase, and the rest become bad debts. There are no
accounts receivable outstanding at the beginning of October.
Calculate the budgeted cashflows from sales for December,
January and February.
Cash collections for = 30% of the
the month.
current sales
+ 60% of
previous month’s
credit sales
+ 35% of two
month’s previous
credit sales
Cash collections for = 30% x
December =
$300,000 =
$141,800
$90,000
+ 60% x (70% x
$100,000) =
$42,000
+ 35% x (70% x
$40,000 =
$9,800
Cash collections for = 30% x
January =
$100,000 =
$180,500
$30,000
+ 60% x (70% x
$300,000) =
$126,000
+35% x (70% x
$100,000) =
$24,500
Cash collections for
February =
$127,500
Carrie’s Snowblowers

(Continued)
Budgeting for Cash Disbursements on Purchases.
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Because of the uncertainty of sales forecasts, the
company has a policy of having 120% of the
following month’s forecast sales available at the
beginning of each month. Prepare the purchasing
schedule for Carrie company from October,
November, and December. The beginning inventory
in October is 200 units.
When inventories are carried that may change from
time to time, a Balance equation is a useful planning
tool. The Balance equation simply states that for
planning purposes:
‘The unit available’ must equal ‘the units required’.
Carrie’s Snowblowers
(Continued)
Units Available
= Period Sales
Purchases for the
period
+ Beginning
inventories
= Period Sales
Thus: Purchase during
the current month
= Sales for
the current
month
+ (120% x next - (120% x
month’s sales
current month’s
sales
Purchases for October
= 600 units
= 200 units
+ 1.2 x 500
units
- 200 units
Purchases for
November = 1,700
units
= 500 units
+ 1,800 units
- 600 units
Purchases for
December = 300 units
Purchases for January
= 140 units
+ Ending Inventory
+ Ending
Inventories
Carrie’s Snowblowers

(Continued)
Purchases Schedule
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Month
October
November
December
January
February
March
Unit Purchases
600
1,700
300
140
No budgeted purchases
No budgeted purchases
Carrie’s Snowblowers
(Continued)
Cost of goods is $100 per unit Inventories are bought on credit.
45% are paid in the month of purchase and 55% are paid in the
month following purchase. Accounts receivable at the beginning
of October were $15,000.
Payments on payables = 45% x current month’s purchases + 55% x last
month’s
October payments
= $42,000
= .45 x 600 units x
$100
+ $15,000 (given)
November payments
= $109,500
= .45 x 1,700 units x
$100
+ .55 x 600 units x $100
December payments
= $107,000
= .45 x 300 units x
$100
+ .55 x 1,700 units x $100
January payments
= $22,800
February payments
= $7,700
Carrie’s Snowblowers
(Continued)
Expenses on the income statement for Selling, General and
Administrative costs include noncash expenses for depreciation of
$15,000. Monthly selling costs include a variable shipping cost of
$5 per unit. The fixed expenses for SG&A are $40,000 a month.
Payments for SG&A = $5 x sales units + total fixed expenses – noncash
expenses
= $5 x sales units + ($40,000 – $15,000)
Payments in October
= $5 x 200 units + $25,000
= $26,000
Payments in November
= $5 x 500 units + $25,000
= $27,500
Payments in December
= $5 x 1,500 units + $25,000
= $32,500
Payments in January
= $5 x 500 + $25,000
= $27,500
Payments in February
=?
= $26,000
Payments in March
=?
= $25,050
Carrie’s Snowblowers
(Continued)
Capital and Irregular Payments.
In November, Carrie company buys new machinery for $20,000 in
cash and $5,000 a month for the succeeding four months.
Payments in October
Payments in November
= $20,000
Payments in December
= $ 5,000
Payments in January
= $ 5,000
Payments in February
= $ 5,000
Payments in March
= $ 5,000
Due to operating uncertainties and forecasting errors in the past, Carrie
Company has a policy of having at least $20,000 in cash at the
beginning of each month even if this means borrowing the money.
Beginning cash + Cash receipts = Cash payments + Ending cash
Cash available = Cash required
Carrie’s Snowblowers
(Continued)
Cash Budget for Carrie Company — 4th Quarter
October
Beginning Cash Balance
November December 4th Quarter
$40,000
$20,000
$ 20,000
$ 40,000
Sales and Receivables
$12,000
$46,800
$141,800
$200,600
Total cash available
$52,000
$66,800
$161,800
$240,600
$42,000
$109,500
$107,000
$258,500
26,000
27,500
32,500
86,000
20,000
5,000
25,000
Cash collections:
Less cash disbursements:
Purchases
SG&A
Capital equipment
Total cash
requirements
$68,000
$157,000
$144,500
$369,500
Excess (Deficit)
(16,000)
(90,200)
17,300
(128,900)
Borrowings (Repayments)
$36,000
$110,200
$ 2,700
$148,900
Ending Balance
$20,000
$ 20,000
$ 20,000
$ 20,000
Carrie’s Snowblowers
(Continued)
Fourth Quarter Income Statement, Carrie Company
Sales
2,200 units x $200
$440,000
Cost of Sales
2,200 units x $100
220,000
Gross margin
220,000
Less:
SG&A
Cash and noncash
Interest
payable
1% per month on outstanding
balance
Net income
131,000
3,311
$ 85,689
Why does the company have to borrow money when it is so
profitable?
What Makes the Budgeting Process
Successful?

Top management commitment.
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Budgeting is part of overall good management.
It operationalizes the strategic plan.
It guides day-to-day operational control
It is the basis for performance evaluation.
Communication to employees about how the
strategic plan is going to work.
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Forces everyone to plan.
Formalizes the planning process.
Provides for financial resource allocations.
(Continued)
What Makes the Budgeting Process
Successful? (Continued)
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Gain Employee commitment.
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Coordination of value chain processes.
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Employees participate in determining the budget.
Employees are rewarded for good cash management
Determine how change in the sales forecast affects
purchasing and production processes.
Effect on administrative support processes from
changes in production schedules.
Use the budget.

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Continuously update the budget for changing
circumstances
Budget only for programs that add value.
Comparing Participative and Authoritative
Budgeting
Goals
Participative
Authoritative
Get needed
information.
If best source is
employees.
If best source is top
management.
Minimize time and
effort
Time and effort
increase with more
people involved.
Less people involved
speeds up the process.
Communicate
budget information
throughout
organization and
coordinate
operations.
Accomplished by twoway information flows
(back and forth
between workers and
managers).
Plans understood
because workers
involved from the
beginning of the
process.
Downward flow only
passes top management
information to workers.
Because budget is
imposed extra
explanation and
instruction may be
needed for coordination.
Comparing Participative and Authoritative
Budgeting
Goals
Participative
Authoritative
Budget commitment
Through participation
and negotiation.
Communication fosters
better understanding
of strategic plan.
Must come from already
existing loyalty to
organization. Limited
understanding of how
budget is linked to
strategic plan.
Motivation to do
better than the
budgets.
Participation leads to
higher motivation if
individual performance
is important within the
corporate culture.
The budget is not an
important motivator if
the corporate culture is
characterized by workers’
pre-existing dedication to
the organization.
Driving out slack.
Participation and peer
pressure through
information sharing.
Continuous and zerobased budgets
Don’t allow private
lobbying.
Continuous and zerobased budgets.