.
CASH BUDGET
The cash budget is one of the most important elements of the
budgeted balance sheet. The cash budget presents the expected receipts
(inflows) and payments (outflows) of cash for a period of time.
Information from the various operating budgets, such as the sales budget,
the direct materials purchases budget, and the selling and administrative
expenses budget, affects the cash budget. In addition, the capital
expenditures budget, dividend policies, and plans for equity or long term
debt financing also affect the cash budget. The following shows the
monthly cash budget for January, February and March 2008, for the company
Colt manufacturing, Inc.
Estimated Cash Receipts
Estimated cash receipts are planned additions to cash from
sales and other resources, such as issuing securities or collecting
interest. A supporting schedule can be used in determining the collections
from sales. To illustrate this schedule, assume the following information:
Accounts receivable, January 1,
2000 ...............................................................
.......
$270,000
January
sales
970,000
February
Budgeted
$1,080,000
March
$1,240,000
$
The company Colt Manufacturing, Inc. expects to sell 10% of
its merchandise for cash. Of the remaining 90% of the sales on account,
60% are expected to be collected in the month of the sale and the remainder
in the next month. Using this information we prepare the schedule of
collection of sales, shown in the following table. The cash receipts from
sales on account are determined by adding the amounts collected from
credit sales earned in the current period (60%) and the amounts accrued
from sales in the previous period as accounts receivable.
Colt Manufacturing, Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2008
Jan Febr Mar
uar uary ch
y
.
Receipts from cash sales:
Cash sales (10% X current month's sales - Note
A)
.
$10 $124 $97
8,0 ,000 ,00
00
0
Receipts from sales on account:
Collections from prior month's sales (40% of
previous month's credit sales - Note B)
$37 $388 $44
0,0 ,800 6,4
00
00
Collections from current month's sales (60% of
current month's credit sales - Note C)
583 669, 523
,30 600 ,80
0
0
Total receipts from sales on account
$95 $1,0 $97
3,2 58,4 0,2
00 00 00
NOTE
A:
$108,000 = $1,080,000 X 10%
$124,000 = $1,240,000 X 10%
$97,000 =
B:
$970,000 X 10%
NOTE
$370,000, given as January 1, 2008 Accounts Receivable balance.
$388,800 = $1,080,000 X 90% X 40%
$446,400 = $1,240,000 X 90% X 40%
NOTE
C:
$583,200 = $1,080,000 X 90% X 60%
$669,600 = $1,240,000 X 90% X 60%
$523,800 =
$970,000 X 90% X 60%
Estimated Cash Payments
Estimated cash payments are planned reductions in cash from
naufacturing costs, selling and administrative expenses, capital
expenditures, and other sources, such as buying securities or paying
interest or dividends. a supporting schedules can be used in estimating
the cash payments for manufacturing costs. Assume the following
information for the company Colt Manufacturing, Inc.:
Accounts payable, January 1,
2000 ...............................................................
.......
$190,000
January
costs
2,000
February
Manufacturing
$840,000
$780,000
March
$81
Depreciation expense on machines is estimated to be $24,000
per month and is included in the manufacturing costs. The accounts payable
were incurred for manufacturing costs. The company expects to pay 75% of
the manufacturing costs in the month in which they are incurred and the
balance in the next month. Using this information, a schedule of payments
has been prepared as shown in the next table:
Colt Manufacturing, Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2008
Jan Feb Mar
uar rua ch
y ry
Payments of prior month's manufacturing costs
25% X previous month's manufacturing costs (less $19 $20 $18
depreciation) - Note A
0,0 4,0 9,0
00 00 00
.
Payments of current month's manufacturing costs
75% X current month's manufacturing costs $61 $56 $59
(less depreciation) - Note B
2,0 7,0 1,0
00 00 00
Total payments
A:
$80 $77 $78
2,0 1,0 0,0
00 00 00
NOTE
$190,000, given as January 1, 2008 Accounts Payable balance.
$204,000 = ($840,000 - $24,000) X 25%
$189,000 = ($780,000 - $24,000) X 25%
NOTE
B:
$612,000 = ($840,000 - $24,000) X 75%
$567,000 = ($780,000 - $24,000) X 75%
$591,000 = ($812,000 - $24,000) X 75%
Completing the Cash Budget
To complete the cash budget for the company Colt Manufacturing,
Inc., assume that the following is expected by the company:
Cash balance on January
1
................................................................
......
$280,000
Quarterly taxes paid on March
31
..........................................................
$150,000
Quarterly interest expense paid on January
10
.....................................
$22,500
Quarterly interest revenue received on
march 21
..................................
$24,500
Sewing equipment
purchased
........................................................
...........
$274,000
In addition, monthly selling and administrative expenses,
which are paid in the month incurred, are estimated as follows:
January
bruary
expenses
$145,000
Fe
March
Selling and administrative
$160,000
$165,000
We can compare the estimated cash balance at the end of the
period with the minimum balance required by operations. Assuming that the
minimum cash balance for Colt Manufacturing, Inc. is $340,000, we can
determine any expected excess or deficiency.
The minimum cash balance protects against variations in
estimates and for unexpected cash emergencies. For effective cash
management, much of the minimum cash balance should be deposited in
income-producing securities that can be readily converted to cash. U.S.
Treasury Bills or Notes are examples of such securities.
The
following table show the cash budget for the company
Colt Manufacuring, Inc.:
Colt Manufacturing, Inc.
Cash Budget
For the Three Months Ending March 31, 2008
Janu Febr Marc
ary uary h
Estimated cash receipts from:
Cash sales
$108 $124 $97,
,000 ,000 000
Collections of accounts receivable
953, 1,05 970,
200 8,40 200
0
$24,
500
Interest revenue
Total cash receipts
$1,0 $1,1 $1,0
61,2 82,4 91,7
00 00 00
Estimated cash payments for:
Manufacturing costs
$802 $771 $780
,000 ,000 ,000
Selling and administrative expenses
160, 165, 145,
000 000 000
Capital additions
Interest expense
Income taxes
22,5
00
150,
000
Total cash payments
Cash increase (decrease)
274,
000
$984 $1,2 $1,0
,500 10,0 75,0
00 00
$76, ($27 $16,
700 ,600 700
)
Cash balance at beggining of month
280, 356, 329,
000 700 100
Cash balance at end of month
$356 $329 $345
,700 ,100 ,800
Minimum cash balance
340, 340, 340,
000 000 000
Total payments
($16 ($10 $5,8
,700 ,900 00
)
)
CAPITAL EXPENDITURES BUDGET
The capital expenditures budget summarizes plans for
acquiring fixed assets. Such expenditures are necessary as machinery and
other fixed assets wear out, become obsolete, or for other reasons need
to be replaced. In addition, expanding plant facilities may be necessary
to meet increasing demand for a company's product.
The useful life of many fixed assets extends over long
periods of time.
In addition, the amount of the expenditures for such
assets may vary from year to year . It is normal to project the plans for
a number of periods into the future in preparing the capital expenditures
budget. The following table shows a five-year capital expenditures
budget for Colt Manufacturing, Inc.
Colt Manufacturing, Inc.
Capital Expenditures Budget
For Five Years Ending December 31, 2008
Item
2004
20
2006
2007
20
05
$400,000
$280,000 $3
60
,0
00
274,000 $2 $560,000
60
,0
00
200,000
Machinery - Cutting Department
Machinery - Sewing Department
Office Equipment
Total
08
90
,0
00
$674,000 $3 $560,000 $480,000
50
,0
00
60
,0
00
$4
20
,0
00
BUDGETED BALANCE SHEET
The budgeted balance sheet estimates the financial
condition at the end of
a budget period. The budgeted balance sheet
assumes that all operating budgets and financing plans are met. It is
similar to a balance sheet based on actual data in the accounts. For this
reason, a budgeted balance sheet is not illustrated for the company Colt
Manufacturing, Inc. If the budgeted balance sheet indicates a weakness
in financial position, revising the financing plans or other plans may
be necessary. For example, a large amount of long-term debt in relation
to stockholders' equity might require revising financing plans for
capital expenditures. Such revisions might include issuing equity rather
than debt.