Preparation of a cash budget Explanation: What is a Cash budget? It is an estimation of the cash flows of an entity over a specific period. Aim of a cash budget: ensuring efficient allocation of cash resources. Sources of inputs to the Cash budget: Inflows: eg. Sales, Issue of debt, issue of shares, interest receivable Outflows: e,g Purchases (Goods, Services), Equipment, Rent, Electricity,Tax EXCLUSIONS Discounts, Irrecoverable debts, Depreciation, Treatment of Discounts, depreciation & irrecoverable debts: Case study used for illustration. Nathi Engineers manufacture bolts, and it estimates $600,000 sales for the months of June ($150,000) July (200,000), and August (250,000). At a retail price of $40 per box, the company estimates sales of 5,000 boxes of bolts each month. Nathi forecasts that 50% will be cash sales, which will attract a 5% discount, 30% will be collected in the month following the sale, 15% will be collected two months after the sale and 5% will not be recovered. The beginning cash balance for June is forecast to be $40,000, Nathi also projects $200,000 in cash inflows from sales made earlier, 70% receivable in June and the balance in July 20X3.On the expense side, Nathi has to also calculate the cost of production required to manufacture the bolts that meet customer demand. The company expects 1,000 boxes of bolts to be in the beginning inventory, and will be paid for in Jun 20X3, which means a minimum of 4,000 boxes must be produced in June. The production cost is $30 per box. 80% of production costs are payable in the same month at a discount of 5% and the balance payable in the following month. The company also expects to pay $30,000 monthly, on costs not directly related to production, such as insurance, office rent etc. in the month of July 20X3, it also expects to buy cash, equipment of R20,000 in August 20X3 The company policy is to depreciate equipment using 20% per annum Straight line with no residual value. Question: Prepare a cash budget for the period from June to August 20X3. Briefing: Steps of Creating a Cash Budget: Check if the entity will have opening cash balance, 2. Establish reliable forecasts of the company's cash inflows. 3. Establish reliable forecasts of the company's cash outflows. 4. Obtain the closing cash balance for each month using the formula: Closing Balance = Opening Balance + Cash Inflows - Cash Outflows. Answer comprehensively explained. Conclusion: A Cash budget is an estimation of the cash flows of an entity over a specific period. It is aimed at ensuring efficient allocation of cash resources, The key to accurate cash budgets is to remember that receipts and payments are based on when they will occur. Discounts and Bad debts are deducted from the total cash flows. Depreciation is a non-cash item and must not appear in the cash budget.