What are the causes of cash flow problems?

Cash flow problems are often caused by poor forecasting but can also be caused by slow payment from clients or suppliers, unforeseen expenditure incurred before the end of a reporting period, or even an increase in financing costs.

When should cash budgets be prepared?

The cash budget is prepared following the operating budgets (selling expenses, sales, manufacturing expenses or merchandise purchases, and general and administrative expenses) and the capital expenditures budget has been accounted for.

What is the main purpose of a cash budget?

The main purpose of a cash budget is to help manage incoming and outgoing cash flow to make informed decisions about how best to utilize its resources.

What is included in the cash budget?

The cash budget consists of sources of cash and uses of cash. The sources of cash section comprises the beginning cash balance, cash receipts from cash sales, accounts receivable collections, and the sale of assets. The uses of cash section contains all planned cash expenditures from the direct materials budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget. This section may also comprise line items for fixed asset purchases and dividends to shareholders.

What is incremental budgeting?

Incremental budgeting is a traditional budgeting method with which the budget is produced by taking the budget of the actual period or actual performance as a base, with incremental amounts then being added for the new budget period.

Cash Budgets: Practical Problems and Solutions

Problem 1

From the information below, prepare a cash budget for the period from January to April.

Expected Sales		Expected Purchase
	$		$
Jan.	60,000	Jan.	48,000
Feb.	40,000	Feb.	80,000
Mar.	45,000	Mar.	81,000
Apr.	40,000	Apr.	90,000

The wages to be paid to workers amount to $5,000 each month. Also, the bank balance on 1st January was $8,000. The management decided on the following:

If the deficit fund is within the limit of $10,000, it is possible to make arrangements with the bank.

If the deficit fund exceeds $10,000 but is within the limit of $42,000, the issue of debentures is preferred.

If the deficit fund exceeds $42,000, the issue of shares is preferred (considering the fact that it is within the limit of authorized capital).

Solution

Particulars	Jan.	Feb.	Mar.	Apr.
Receipts:	$	$	$	$
Opening balance	8,000	15,000	-	-
Sales	60,000	40,000	45,000	40,000
Issue of debentures	-	30,000	41,000	-
Issue of shares	-	-	-	55,000
Total	68,000	85,000	86,000	95,000
Less: Payments
Purchases	48,000	80,000	81,000	90,000
Wages	5,000	5,000	5,000	5,000
Closing cash	53,000	85,000	86,000	95,000
	15,000	-	-	-

Problem 2

From the information below, prepare a cash budget for a company for April, May, and June 2024 in a columnar form.

Month	Sales	Purchases	Wages	Exp.
Jan. (actual)	80,000	45,000	20,000	5,000
Feb. (actual)	80,000	40,000	18,000	6,000
Mar. (actual)	75,000	42,000	22,000	6,000
Apr. Budget	90,000	50,000	24,000	6,000
May Budget	85,000	45,000	20,000	6,000
Jun. Budget	80,000	35,000	18,000	5,000

You are further informed that:

10% of purchases and 20% of sales are for cash.

The average collection period of the company is half a month and credit purchases are paid off regularly after one month.

Wages are paid half monthly and the rent of $500, excluded in expense, is paid monthly.

Cash and bank balance on April 1 was $15,000, and the company aims to keep it below this figure at the end of every month. The excess cash is placed in fixed deposits.

Solution

Cash Budget for 2024

	April ($)	May ($)	June ($)
Cash & bank balance	15,000	11,700	12,700
Add:
Cash sale (20%)	18,000	17,000	16,000
Cash collections from Drs.	66,000	70,000	66,000
	99,000	98,700	94,700
Less:
Cash outflow
Cash flow (10%)	5,000	4,500	3,500
Payment of Crs.	37,800	45,000	40,500
Wages	23,000	22,000	19,000
Rent	500	500	500
Exp.	6,000	6,000	6,000
Fixed deposits	15,000	8,000	13,000
Cash balance (closing)	21,700	12,700	13,200
	99,000	98,700	94,700

Problem 3

From the following information, prepare a monthly cash budget for the three months ending 31st December 2024.

Month	Sales ($)	Materials ($)	Wages ($)	Production ($)	Admin. Selling, etc ($)
Jun.	3,000	1,800	650	225	160
Jul.	3,250	2,000	750	225	160
Aug.	3,500	2,400	750	250	175
Sep.	3,750	2,250	750	300	175
Oct.	4,000	2,300	800	300	200
Nov.	4,250	2,500	900	350	200
Dec.	4,500	2,600	1,000	350	225

The credit terms are as follows:

Sales — 3 months to debtors. 10% of sales are in cash. On average, 50% of credit sales are paid on the due dates, while the other 50% are paid in the next month.

Creditors for material — 2 months.

The lag in payment for wages is 1/4 month and 1/2 month for overheads.

The cash and bank balance on 1st October is expected to be $1,500.

Other information is given as follows:

Plant and machinery are to be installed in August at a cost of $24,000. This sum will be paid in monthly installments of $500 each from 1st October.

Preference share dividends @ 5% on $50,000 are to be paid on 1st December.

Calls on 250 equity shares @ $2 per share are expected on 1st November.

Dividends from investments amounting to $250 are expected on 31st December.

Income tax (advance) is to be paid in December $500

Solution

Cash Budget for Three Months Ending 31 Dec. 2024
Details:	Oct. ($)	Nov. ($)	Dec. ($)
Balance b/d	1,500.00	537.50	350.00
Receipts (estimated):
Sales	3,212.50	3,462.50	3,712.50
Capital	-	500.00	-
Dividends	-	-	250.00
Total (A)	4,712.50	4,500	4,312.50
Payments:
Creditors	2,400.00	2,250.00	2,300.00
Wages	787.50	875.00	975.00
Overheads:
Production	300.00	325.00	350.00
Adm. S. & D.	187.50	200.00	212.50
Pref. Dividend	-	-	2,500.00
Income tax	-	-	500.00
Plant and Machinery (500 each)	5,00.00	5,00.00	5,00.00
Total (B) Year	4,175.00	4,150.00	7,337.50
Balance c/d (A - B)	537.50	350	(-3,025)

Calculation of Amount of Sales

Month	Sale ($)	Oct. ($)	Nov. ($)	December ($)
Jun.	3,000	1,350.00	-	-
Jul.	3,250	1,462.50	1,462.50	-
Aug.	3,500	-	1,575.00	1,575.00
Sep.	3,750	-	-	1,687.50
Oct.	4,000	400.00	-	-
Nov.	4,250	-	4,250	-
Dec.	4,500	-	-	450.00
Total	-	3,212.50	3,462.50	3,712.50