The document defines a cash budget and its purpose. A cash budget forecasts the timing and amounts of future cash inflows and outflows over a specific period. It provides early warning of potential liquidity problems and identifies future funding needs. It allows a company to estimate cash shortages or surpluses, set borrowing limits, maximize interest earnings, and aid in liquidity management.

2. 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.

3. 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

4. •
•
•
•
•
•
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

5. There are two types of cash budget:
1. Receipts and payments budget
2. Balance sheet forecast

6. 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

7. 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

8. 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.

9. 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

10. 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
-

11. 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

12. 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.

13. 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

14. Let’s calculate
Activity One
Page 23
together.

15. 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

16. 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.

17. 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

18. So budget payments to suppliers:
January
March
RM
Payments to
suppliers
February
RM
RM
300,000
360,000
390,000

19. 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

20. 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

21. 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

22. 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

23. • 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.

24. WHY
Budgets are prepared based on assumption and
Estimates.
So, it can be
inaccurate

25. •
-
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

26. • Preparing a series of different forecast-different scenario.
• Preparing cash forecasts as a range of possible
outcomes.
• Using probability analysis.

27. 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.

28. 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.