Cash Budget

Cash is an essential resource. Without an adequate supply of cash to meet obligations as they come due, a business will become bankrupt. Even the most successful businesses can get caught by cash crunches due to delays in collecting receivables, overspending on inventory, capital expenditures, and so on. These types of cash crises can usually be avoided. The cash budget provides the necessary tool to anticipate cash receipts and disbursements, along with planned borrowings and repayments.

Cash Receipts Section

The sales budget is complemented by an analysis of the resulting expected cash collections. Sales often occur on account, so there can be a delay between the time of a sale and the actual conversion of the transaction to cash. For the budget to be useful, careful consideration must also be given to the timing and pattern of cash collections. This is simpler in a retail environment in which a large majority of customer collections result in immediate cash (including debit and bank credit cards).  

Review illustrations below closely, noting the expected pattern of cash collections of sales for a retailer and manufacturer as follows:

Sales on credit create more detailed collections calculations as illustrated below for a manufacturing firm (or retail/service company that bills customers at end of period).

 

Note that the lower portion of the sales budget converts the expected sales to expected collections. Manufacturing and wholesale dealers normally give retail customers credit terms of 30 to 45 days, resulting in collections over a series of periods. This example assumes that the company has very few problems with late payments or uncollectible accounts.

 

Source: principlesofaccounting.com, Larry M. Walther, Copyright 2016.

 

Activity

Please complete the following activity.

 

 

ACT-On Frozen Delights credit sales are as follows:

Q1 = $150,000 Q2 = $210,000 Q3 = $180,000

Past experience indicated that 80% of the receivables are collected in the quarter of the sale, 20% in the quarter following the sales. The expected cash receipts from customer collections in Q3 are: