Methods of Preparing Cash Budget

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 31, 2021

Three methods of preparing a cash budget are outlined below:

  • Receipt and payment method
  • Adjusted profit and loss method
  • Balance sheet method

Receipt and Payment Method

Here, cash is received from cash sales, receipts from debtors, the sale of fixed assets and investments, and the issue of shares and debentures. Both capital and revenue receipts are forecasted.

The cash is applied for wage payment, salaries, and overheads, and capital and revenue expenditure are forecasted. It is noteworthy that outstanding payments and accrued incomes are not recorded under this method.

Example

Prepare a cash budget for the months of May, June, and July 2019 based on the following information.

The first piece of information is an income and expenditure forecast, which is shown below.

Income and Expenditure Forecasts

The remaining information for this example is given below:

  • Cash balance on 1 May 2019 amounts to $8,000
  • Plant costing $16,000 is due for delivery in July 2019 with payable 10% on delivery and balance to be paid after 3 months
  • Advance tax of $8,000 each is payable in March and June 2019
  • Period of credit allowed (i) by suppliers, two months; and (ii) to customers, one month
  • Lag in payment of manufacturing expenses amounts to 1/2 month
  • Lag in payment of office and selling expenses amounts to one month

Solution

Cash Budget Solution 1
Notes: 

  • 50% of the manufacturing expenses for April and May will be paid in May, and so on
  • Office and selling expenses of April shall be paid in May, and so on

Adjusted Profit and Loss Method

Under this method, net profit is adjusted by adding items of non-fund expenses and deducting non-fund incomes. This method is used to forecast long-term cash requirements.

Here, the cash forecast is made similar to a fund flow statement. Profit is added by non-fund expenses and non-fund incomes are deducted.

The items of addition include depreciation, goodwill written off, preliminary expenses written off, loss on sale of fixed assets, transfer to general reserves, decrease in the value of current assets, and increase in the value of current liabilities.

The items of deductions are dividends received, interest on debentures, income from properties, increase in current assets, and decrease in current liabilities.

Example

The following is the Balance Sheet of AK Trading Co.:
AK Trading Co. Balance Sheet
Forecasted Trading and Profit and Loss Account
The following is additional information for the year 2019:

  • Shares were issued for $25,000
  • Debentures were issued for $5,000
  • On 31 December 2019, accrued expenses were $1,250, debtors $50,000, creditors $75,000, and land & buildings $100,000

Solution

Cash Budget Adjusted Profit and Loss Account
as on 31 December 2019

Adjusted Profit and Loss method of preparing Cash budget Example

Balance Sheet Method

Under this method, at the end of the budget period, a balance sheet forecast is prepared in which assets and liabilities are also shown. The difference on both sides of the balance sheet represents the overdraft or cash balance, depending on the case.

When assets are less than liabilities, then the difference will be a cash balance. On the other hand, when assets exceed liabilities, the difference will be a bank overdraft.

Example

On 1 January 2019, John Trading Company had $150,000 as share capital, $18,000 as a reserve, $120,000 as investment in fixed assets, $12,000 as debtors, $39,000 as creditors, and $60,000.

To sustain the increase in activity, it is proposed that the stock level be increased by 100% by the end of the year. The machinery to be purchased during the year will also be worth $6,000.

The estimated profit for the year is $21,000 after charging $12,000 depreciation and 50% profit for taxation. Advance income tax is estimated at $18,000. Trade creditors are likely to be doubled.

A 5% dividend is to be paid and provision for the dividend for next year is to be made. Debtors are estimated to be outstanding for 2 months. The sales budget shows sales of $450,000.

Required: Make an estimate of the company’s cash position by budgeted cash balance sheet as on 31 December 2019.

Solution

Budgeted Cash Balance Sheet Solution
Working:

  • The previous year’s loss can be ascertained by preparing an opening balance sheet as follows:

Opening Balance Sheet

  • The calculation for debtors at the end of the year is the following:

Calculation For Debtors

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

3 thoughts on “Methods of Preparing Cash Budget”

  1. Pls help me classifiey this may be expenses or income
    Production overhead amount to #2,150,000 are paid in which they incurred include depreciation of #70,000 and prepaid rent #500,000

    Reply

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