Uploaded by Sandra Weppelman

Budgeting notes

 Defn of budget: the formal future plans (in written form) and actions of a
business in quantitative terms (expresses in figures)
 Cash budget – shows the expected inflow and expected outflow of cash
 For effective forecasting:
o Have reliable and representative records of past transactions
o Consider external factors such as good/bad economic conditions and
o Consider internal logical assumptions and contractual obligations
 Internal factors to be considered
o Purchase of fixed assets
o Purchase of stock
o Sales and debtors collection period
o Purchases and creditors payment period
o Financing methods and sources
 Cash budget servers as a control mechanism which is essential for effective
planning. It shows expected cash inputs and cash outputs over a period
 Helps to determine the liquidity of the business – does the business have
enough cash to pay its expenses in the short term
 Cash budget advantages:
o Trader not burdened with screening debtors
o Less administrative work – no need to maintain and monitor debtors
o Positive impact on working capital – cash received immediately
therefore not tied up in working capital
o Cash flow position of company is improved – no waiting period for
o No possibility of bad debts as no debtors
 With credit terms and budgets:
o Consider payment terms and trends of both debtors and creditors
o Consider if terms are complied with – ie payments are made when
they are supposed to be made
o Consider discounts offered and received
 Variable base stock
o stock on hand varies from month to month
o to determine stock to be purchased, cost of sales for current or future
months is used
 Fixed base stock
o Stock is maintained at a fixed value
o Stock is replenished to this amount monthly and is based on cost of
sales in current month
o Implies that cost of sales = total stock purchases for the month
o USED by Schools
 Cash budget looks at future inflows and outflows of cash
 Projected income statement looks at expected income (revenue) and
expenditure during the budget period
 Statement shows expected net profit in the future
 Following is needed:
o Income statement for past year/month
o Expected monthly sales figure or growth rate
o Percentage gross profit margin on cost of sales or turnover
o Expected other income
o Expected operating expenses
o Expected interest payable on loans
o Expected non-cash expenses such as depreciation and bad debts
What is does
Cash Budget
Projects monthly cash receipts and
cash payments over the budget
A planning instrument used by
management to monitor whether
the business is on track without
running out of cash resources
 NO non-cash items are
included (eg bad debts,
 Include planned capital income
and capital expenses (eg cash
deposit on vehicle, cash for sale
of assets, capital contributions)
Determines cash surplus/shortfall
and projected monthly bank
balance over budget period
Projected Income Statement
Projects monthly profits/losses
over the budget period
Include non-cash items (eg bad
debts, depreciation)
NO capital items included (eg
capital contributions, fixed
assets bought/sold)
Determines the projected monthly
net profit/loss over the budget