Cash management

2. Highlight
Definition
General Formula/Concept
Why cash budget is prepared?
Why is cash budget important?
Question & Solution
Uses of cash budget(With Explanation)
Cash Position-Appropriate Management Action
Queries?

3. Cash Budget
Definition
• A cash budget is a forecast of estimated cash receipts,
estimated cash payments and the resultant cash position
for a certain period of time.
• Determines the expected cash balance of the organization
business at specific intervals.

10. Uses of cash budget

11. Question
• The directors of Kingston & Co. were concerned about the the company’s
cash flow. They requested their accountant to prepare a cash budget for the
four months ending 30 April 2016.
• (i) The following sales figures are for the months of November 2015 to
June 2016. The figures from January 2016 onward are estimated:

12. AdditionalInfo.
• Half the sales are normally paid for in the month in which they occur and the
customers are rewarded with a 5% cash discount. The remaining sales are paid
for net in the month following the sale.
• (ii) Goods are sold at a mark-up of 25% on the goods purchased one month
before sale. Half of the purchases are paid for in the month of purchase and a
4% prompt settlement discount is received. The remainder is paid in full in the
following month.
• (iii) Wages of $12000 per month are paid in the month in which they are
earned. It is expected that the wages will be increased by 10% from 1 March
2016.
• (iv) Rent will cost $60000 per annum payable three monthly in advance in
January, April, July and December each year.
• (v) The directors have arranged a bank loan of $60000 which would be
credited to company’s current account in February 2016.
• (vi) The half-yearly interest on 200000, 8% debentures of $1 each is due to be
paid on 15 January 2016.
• (vii) The ordinary dividend of $12000 for the year 2015 will be paid in March
February 2016.
• (viii) The bank balance at 31 December 2015 is $12000.
• Required:
• Prepare a cash budget for the four months ended 30 April 2016. Give your
answers to the nearest dollar ($).

13. Cash Budget
For the four months ending 30 April 2016

14. Uses of a Cash Budget:
It helps to identify short and long term cash needs which
give time to the management to take appropriate actions
in time to avoid such problems.
It determines future ability of the business to pay trade
payables and other debts early to take benefit of cash
discount.
It helps a business to determine that how much credit it
can extend to its customers before falling into liquidity
problems.
It reveals any expected surplus of cash which may be
invested or loaned for a shorter period.
It ensures that sufficient cash is available when required
to fulfill regular operations.
Why Cash Budget needed?

15. Cash Position Appropriate Management Action
Short term surplus
•Pay trade payables early to obtain discount
•Purchases of goods in bulk to avail trade
discounts
•Attempt to increase sales by extending credit to
trade receivables
•Make investments on short term basis
Short term deficits
•Renegotiate overdraft limit
•Give incentives to customers to purchase for cash
•Offer cash discounts to trade receivables for
immediate payments
•Negotiate longer credit from suppliers if possible
Long term surplus
•Make investments on long term basis
•Expand level of operations
•Replace or improve non-current assets
•Redemption of preference share or debentures
Long term deficit
•Issue of shares or injection of new capital by
owner
•Arrange long term loan from bank
•Issue of debentures
•Sale of surplus non-current assets
•Consider shut down or disinvestment
opportunities

16. Any Queries Please?
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