.
CASH BUDGET
The cash budget is one of the most important elements of the budgeted balance sheet. The cash budget presents the expected receipts (inflows) and payments (outflows) of cash for a period of time. Information from the various operating budgets, such as the sales budget, the direct materials purchases budget, and the selling and administrative expenses budget, affects the cash budget. In addition, the capital expenditures budget, dividend policies, and plans for equity or long term debt financing also affect the cash budget. The following shows the monthly cash budget for January, February and March 2008, for the company Colt manufacturing, Inc.
Estimated Cash Receipts
Estimated cash receipts are planned additions to cash from sales and other resources, such as issuing securities or collecting interest. A supporting schedule can be used in determining the collections from sales. To illustrate this schedule, assume the following information:
Accounts receivable, January 1, 2000 ...... $270,000
January February March
Budgeted sales $1,080,000 $1,240,000 $970,000
The company Colt Manufacturing, Inc. expects to sell 10% of its merchandise for cash. Of the remaining 90% of the sales on account, 60% are expected to be collected in the month of the sale and the remainder in the next month. Using this information we prepare the schedule of collection of sales, shown in the following table. The cash receipts from sales on account are determined by adding the amounts collected from credit sales earned in the current period (60%) and the amounts accrued from sales in the previous period as accounts receivable.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2008
. / January / February / March
Receipts from cash sales:
Cash sales (10% X current month's sales - Note A) . /
$108,000 /
$124,000 /
$97,000
Receipts from sales on account:
Collections from prior month's sales (40% of previous month's credit sales - Note B) /
$370,000 /
$388,800 /
$446,400
Collections from current month's sales (60% of current month's credit sales - Note C) /
583,300 /
669,600 /
523,800
Total receipts from sales on account / $953,200 / $1,058,400 / $970,200
NOTE A: $108,000 = $1,080,000 X 10%
$124,000 = $1,240,000 X 10%
$97,000 = $970,000 X 10%
NOTE B: $370,000, given as January 1, 2008 Accounts Receivable balance.
$388,800 = $1,080,000 X 90% X 40%
$446,400 = $1,240,000 X 90% X 40%
NOTE C: $583,200 = $1,080,000 X 90% X 60%
$669,600 = $1,240,000 X 90% X 60%
$523,800 = $970,000 X 90% X 60%
Estimated Cash Payments
Estimated cash payments are planned reductions in cash from naufacturing costs, selling and administrative expenses, capital expenditures, and other sources, such as buying securities or paying interest or dividends. a supporting schedules can be used in estimating the cash payments for manufacturing costs. Assume the following information for the company Colt Manufacturing, Inc.:
Accounts payable, January 1, 2000 ...... $190,000
January February March
Manufacturing costs $840,000 $780,000 $812,000
Depreciation expense on machines is estimated to be $24,000 per month and is included in the manufacturing costs. The accounts payable were incurred for manufacturing costs. The company expects to pay 75% of the manufacturing costs in the month in which they are incurred and the balance in the next month. Using this information, a schedule of payments has been prepared as shown in the next table:
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2008
January / February / March
Payments of prior month's manufacturing costs
25% X previous month's manufacturing costs (less depreciation) - Note A /
$190,000 /
$204,000 /
$189,000
.
Payments of current month's manufacturing costs
75% X current month's manufacturing costs (less depreciation) - Note B /
$612,000 /
$567,000 /
$591,000
Total payments / $802,000 / $771,000 / $780,000
NOTE A: $190,000, given as January 1, 2008 Accounts Payable balance.
$204,000 = ($840,000 - $24,000) X 25%
$189,000 = ($780,000 - $24,000) X 25%
NOTE B: $612,000 = ($840,000 - $24,000) X 75%
$567,000 = ($780,000 - $24,000) X 75%
$591,000 = ($812,000 - $24,000) X 75%
Completing the Cash Budget
To complete the cash budget for the company Colt Manufacturing, Inc., assume that the following is expected by the company:
Cash balance on January 1 ...... $280,000
Quarterly taxes paid on March 31 ...... $150,000
Quarterly interest expense paid on January 10 ...... $22,500
Quarterly interest revenue received on march 21 ...... $24,500
Sewing equipment purchased ...... $274,000
In addition, monthly selling and administrative expenses, which are paid in the month incurred, are estimated as follows:
January February March
Selling and administrative expenses $160,000 $165,000 $145,000
We can compare the estimated cash balance at the end of the period with the minimum balance required by operations. Assuming that the minimum cash balance for Colt Manufacturing, Inc. is $340,000, we can determine any expected excess or deficiency.
The minimum cash balance protects against variations in estimates and for unexpected cash emergencies. For effective cash management, much of the minimum cash balance should be deposited in income-producing securities that can be readily converted to cash. U.S. Treasury Bills or Notes are examples of such securities.
The following table show the cash budget for the company Colt Manufacuring, Inc.:
Cash Budget
For the Three Months Ending March 31, 2008
January / February / March
Estimated cash receipts from:
Cash sales / $108,000 / $124,000 / $97,000
Collections of accounts receivable / 953,200 / 1,058,400 / 970,200
Interest revenue / $24,500
Total cash receipts / $1,061,200 / $1,182,400 / $1,091,700
Estimated cash payments for:
Manufacturing costs / $802,000 / $771,000 / $780,000
Selling and administrative expenses / 160,000 / 165,000 / 145,000
Capital additions / 274,000
Interest expense / 22,500
Income taxes / 150,000
Total cash payments / $984,500 / $1,210,000 / $1,075,000
Cash increase (decrease) / $76,700 / ($27,600) / $16,700
Cash balance at beggining of month / 280,000 / 356,700 / 329,100
Cash balance at end of month / $356,700 / $329,100 / $345,800
Minimum cash balance / 340,000 / 340,000 / 340,000
Total payments / ($16,700) / ($10,900) / $5,800
CAPITAL EXPENDITURES BUDGET
The capital expenditures budget summarizes plans for acquiring fixed assets. Such expenditures are necessary as machinery and other fixed assets wear out, become obsolete, or for other reasons need to be replaced. In addition, expanding plant facilities may be necessary to meet increasing demand for a company's product.
The useful life of many fixed assets extends over long periods of time. In addition, the amount of the expenditures for such assets may vary from year to year . It is normal to project the plans for a number of periods into the future in preparing the capital expenditures budget. The following table shows a five-year capital expenditures budget for Colt Manufacturing, Inc.
Capital Expenditures Budget
For Five Years Ending December 31, 2008
Item / 2004 / 2005 / 2006 / 2007 / 2008
Machinery - Cutting Department / $400,000 / $280,000 / $360,000
Machinery - Sewing Department / 274,000 / $260,000 / $560,000 / 200,000
Office Equipment / 90,000 / 60,000
Total / $674,000 / $350,000 / $560,000 / $480,000 / $420,000
BUDGETED BALANCE SHEET
The budgeted balance sheet estimates the financial condition at the end of a budget period. The budgeted balance sheet assumes that all operating budgets and financing plans are met. It is similar to a balance sheet based on actual data in the accounts. For this reason, a budgeted balance sheet is not illustrated for the company Colt Manufacturing, Inc. If the budgeted balance sheet indicates a weakness in financial position, revising the financing plans or other plans may be necessary. For example, a large amount of long-term debt in relation to stockholders' equity might require revising financing plans for capital expenditures. Such revisions might include issuing equity rather than debt.