C2 cash budget
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  • 1. Definition Detailed forecast of cash inflows and outflows for a future time period, incorporating revenue and capital items and other cash flow items. Purpose Provide an early warning of liquidity problems and funding needs.
  • 2. To provide early warning of liquidity problem. So, that we can: 1. 2. 3. 4. 5. Estimate and plan future cash shortage or surplus. As reference point to monitoring cash flows. Set borrowing limits and min cost of funds. Max interest earnings Liquidity management
  • 3. • • • • • • Sales of short term investment Short term borrowing Defer some cash spending such as capital expenditure Improve collections of outstanding debts Ask major suppliers to agree on more credit terms Improve cash flows by cutting day-to-day expenditure
  • 4. There are two types of cash budget: 1. Receipts and payments budget 2. Balance sheet forecast
  • 5. Forecast future balance sheet at the specific forecast date. What may require: 1. Of non-current assets (acquisition & disposal) 2. Future inventory 3. Future receivables Level 4. Future payables 5. in shared capital and long term funding 6. in retained profit
  • 6. Apple Co. has the following balance sheet as at 30 May 2012: Non Current Assets Plant and Machinery Current assets Inventory Receivables Bank Total assets RM 16,000 80,000 2,000 Issured share capital Accumulated profits Shareholders funds Current liabilities Dividend payable Trade Payable Total Equity and liabilities RM 192,000 98,000 290,000 216,000 34,000 250,000 10,000 30,000 40,000 290,000
  • 7. Let’s Calculate: The company expects to acquire further plant and machinery costing RM 8,000 during the year to 30 June 2012. a. The levels of inventory and trade receivables are expected to increase by 5% and 10% respectively by 30 June 2012 due to business growth. b. Trade payables and dividend liabilities are expected to be the same at 30 June 2012. c. No share issue is planned, and accumulated profits for the year to 30 June 2012 are expected to be RM 42,000. d. Plant and Machinery is depreciated on a reducing balance basis at the rate of 20% per annum for all assets held at balance sheet date. Produce balance sheet forecast as at 30 June 2012 and predict what the cash balance or bank overdraft will be at that date.
  • 8. 1. Forecast timing and amount of cash receipts and payments. 2. Can divided into shorter time period quarter, monthly, weeks or days. 3. Budget shows: a. Opening balance b. Expected cash receipts and payment c. Net cash flow* d. Closing balance
  • 9. Cash Budget for (period) January February March Cash receipts RM RM RM Cash from receivables 54,000 63,000 58,000 Cash Sales 3,000 4,000 2,000 Cash sales for non current assets 1,000 Total receipts 57,000 68,000 60,000 Cash Payments Payments to suppliers Payments of wages and salaries Payment for non current assets Purchases Payment of dividend Total payments Net cash flow Opening cash balance Closing cash balance April RM 54,000 1,000 500 55,500 24,000 26,000 4,000 29,000 28,000 14,000 - 54,000 5,000 76,000 50,000 58,000 3,000 6,000 9,000 -8,000 9,000 1,000 10,000 1,000 11,000 -2,500 11,000 8,500 - 24,000 26,000 27,000 28,000 3,000 -
  • 10. It is based on receipts and payments. The most complex calculations is receipts from sales and payments to suppliers. RECEIPTS FROM SALES Business might have some cash sales, but mostly on credit. To prepare cash budget, assumptions: • When customers will pay • The level of bad (irrecoverable) debts
  • 11. Estimated 10% of its sales will be cash sales, and the remainder credit sales. Also 50% of credit customers will pay in the month following sale, 30% two months after sale, 15% three months after sale and bad debts will be 5% of credit sales. Total sales figures are as follows: Month RM October 80,000 November 60,000 December 40,000 January 50,000 February 60,000 March 90,000 Required: Prepare a month by month budget of cash receipts from sales for the months January to March.
  • 12. Cash receipts Total sales Cash receipts January February March RM Sales month Cash receipts RM RM October 80,000 10,800 - - November 60,000 16,200 8,100 - December 40,000 18,000 10,800 5,400 January 50,000 5,000 22,500 13,500 February 60,000 - 6,000 27,000 March 90,000 - - 9,000 50,000 47,400 54,900 Total Receipts
  • 13. Let’s calculate Activity One Page 23 together.
  • 14. Similar way of calculating to the cash receipts, need to figures for: • Purchases in each time period. • Estimates amount of credit taken from suppliers. Three types of payment is: 1. Payment for material purchases 2. Payment of wages and salaries 3. Payments for overheads expenses
  • 15. A manufacturing business makes and sell widgets. Each widgets requires two units of raw materials, which cost RM 3 each. Production and sales quantities of widgets each month are as follows: Month Sales and production Units December (actual) 50,000 January (budget) 55,000 February (budget) 60,000 March (budget) 65,000 In the past, the business has maintained its inventory of raw material at 100,000 units. However, it plans to increase raw material inventory to 110,000 units at the end of January and 120,000 units at the end of February. The business takes one month’s credit from it’s suppliers. Required: Calculate the budgeted payments to suppliers each month for raw material purchases.
  • 16. Unit Produc ed 50,000 January March Units Units Units 60,000 March February 55,000 February January Units December December 100,000 65,000 110,000 120,000 130,000 Increase in inventory - 10,000 10,000 - Total purchase quantities 100,000 120,000 390,000 130,000 Purchase cost 300,000 360,000 390,000 130,000
  • 17. So budget payments to suppliers: January March RM Payments to suppliers February RM RM 300,000 360,000 390,000
  • 18. A manufacturing company makes product APPLE, for which the variable overhead cost is RM 2 per unit. Fixed costs are budgeted at RM 450,000 for the year, of which RM 130,000 are depreciation charges. The remaining fixed costs are incurred at a constant rate every month, with the exception of factory rental costs, which are RM 80,000 each year, payable 50% in December and 50% in June. With exception of rental cost, 10% of overhead expenses are paid for in the month they occur and the remaining are paid in following month. The budgeted production quantities of product APPLE are: Months Units September 40,000 October 60,000 November 50,000 December 30,000
  • 19. Fixed Overhead Annual fixed overheads (-) Depreciation Cash Expenses (-) Annual factory rental Monthly Cash expenses for the year 450,000 130,000 320,000 80,000 20,000
  • 20. Variable Overheads Units Variable Overhead Cost Payment in October November December $ $ $ $ September 40,000 80,000 72,000 - - October 60,000 120,000 12,000 108,000 - November 50,000 100,000 - 10,000 90,000 December 30,000 60,000 - - 6,000 84,000 118,000 96,000 Total Payments
  • 21. Overhead Cash Payments October November December $ $ $ Variable Overheads 84,000 118,000 96,000 Fixed Overheads 20,000 20,000 60,000 Total Payments 104,000 138,000 156,000
  • 22. • Is a modeling and risk assessment procedure in which changes are made to significant variables in order to determine the effect of these changes on the planned outcome. • Test the ‘responsiveness’ of a forecast to see how sensitive they are to changes in inputs.
  • 23. WHY Budgets are prepared based on assumption and Estimates. So, it can be inaccurate
  • 24. • - Sales January 2012 the company expects to have $ 15,000 in the bank. Revenue in Jan expected to be $ 25,000 and growth rate 1.25% p/month is predicted during forecast period. • - Operating Expenses Buys inventory 1 month in advance and pay in cash. All sales are on credit. No bad debt. • - Accounts Receivables Days Payment received from customers, 60% (1 months) and 40% (2 months). • - Accounts Payable Days Purchases of capital equipment ($200,000- Feb) & payment of tax ($30,000- Mar) & dividends ($ 40,000 – Apr). • - COS & Gross Profit Margin COS is 65% of revenue. Overhead cost expected to be & 6,500 p/month and rising by 5% at start of each new calendar year. • Interest Rate
  • 25. • Preparing a series of different forecast-different scenario. • Preparing cash forecasts as a range of possible outcomes. • Using probability analysis.
  • 26. Inflation : Process the price of commodities rises over time. Inflation usually measured as percentage. Example, rate of inflation is 20% a year, purchases worth $ 10,000 last year and this year it will cost $ 12,000. So at the same inflation rate next year it will cost $ 14,400. Index number: rate of change of variable specified time to another. There are two types of index: 1. Price relative - changes in price of items over the time. 2. Quantity relative – changes in quantity over the time.
  • 27. Definitions: Sums that have been transferred through a payment clearing system, debited to the originator of the transfer, credited to the recipient and are available to earn interest.