7.10: Cash Budget

The availability and commitment of cash is critical to management planning and operational success. The cash budget provides relevant information by estimating cash receipts and cash payments for one or more periods.

Cash receipts result from cash sales, collection of accounts receivable, other revenue sources, sales of assets, and issuance of stocks and bonds. Cash payments occur due to incurring costs and expenses, paying invoices on account, purchasing assets, paying off debts, and paying interest and dividends. The frequency and amount of these transactions are estimated and consolidated to form the cash budget.

The most common reason for cash receipts is sales to customers, and the most frequent cash payments are due to sales-related costs. The following example will illustrate the preparation of the cash budget.

Assume that Jonick Corporation begin operating on January 1, 2019. Projected sales to customers for the first four months are as follows.

Estimated Sales

	January	February	March	April
Budgeted sales	$68,000	$90,000	$124,000	$139,000
\(\ \quad \quad\)Budgeted cash sales (20%)	13,600	18,000	24,800	27,800
\(\ \quad \quad\)Budgeted sales on account (80%)	54,400	72,000	99,200	111,200

The company expects that 20% of each month’s sales will be for cash and the remainder on account. It anticipates that 40% of sales on account will be collected in the month of sale, 50% will be collected in the following month, and the remaining 10% collected during the second month after the sale.

The following table illustrates the budgeted cash collections from sales for each of the four months with corresponding calculations.

Budgeted Cash Collections from Sales

	January		February		March		April
Cash collections from sales:
Cash collected from cash sales	$13,600	($68,000 x 20%)	$18,000	($90,000 x 20%)	$24,800	($124,000 x 20%)	$27,800	($139,000 x 20%)
Cash collected from this month’s sales on account (40%)	21,760	($54,400 x 40%)	28,800	($72,000 x 40%)	39,680	($99,200 x 40%)	44,480	($111,200 x 40%)
Cash collected from last month’s sales on account (50%)	0	-	27,200	($54,400 x 50%)	36,000	($72,000 x 50%)	49,600	($99,200 x 50%)
Cash collected sales on account two months ago (10%)	0	-	0	-	5,440	($54,400 x 10%)	7,200	($72,000 x 10%)
Total cash collections from sales	$35,360		$74,000		$105,920		$129,080

Each month, the company expects to collect for cash sales plus for sales on account for the current month and for the previous two months. In this example, cash collections are expected to be $35,360 for January, $74,000 for February, $105,920 for March, and $129,080 for April.

Projected purchases from vendors for the first four months are as follows.

Estimated Purchases

	January	February	March	April
Budgeted purchases	$34,000	$45,000	$62,000	$70,000
\(\ \quad \quad\)Budgeted cash purchases (30%)	10,200	13,500	18,600	21,000
\(\ \quad \quad\)Budgeted purchases on account (70%)	23,800	31,500	43,400	49,000

The company expects that 30% of each month’s purchases will be for cash and the remainder on account. It anticipates that 60% of purchases on account will be paid in the month of sale, 30% will be paid in the following month, and the remaining 10% paid during the second month after the sale.

The following table illustrates the budgeted cash payments to vendors for each of the four months with corresponding calculations.

Budgeted Cash Payments from Purchases

	January		February		March		April
Cash payments from purchases:
Cash paid for purchases	$10,200	($34,000 x 30%)	$13,500	($45,000 x 30%)	$18,600	($62,000 x 30%)	$21,000	($70,000 x 30%)
Cash paid for this month’s purchases on account (60%)	14,280	($23,800 x 60%)	18,900	($31,500 x 60%)	26,040	($43,400 x 60%)	29,400	($49,000 x 60%)
Cash paid for last month’s sales on account (30%)	0	-	7,140	($23,800 x 30%)	9,450	($31,500 x 30%)	13,020	($43,400 x 30%)
Cash paid for purchases on account two months ago (10%)	0	-	0	-	2,380	($23,800 x 10%)	3,150	($31,500 x 10%)
Total cash collections from sales	$24,480		$39,540		$56,470		$66,570

Each month, the company expects to pay for cash purchases that month and for purchases on account for the current month and for the previous two months. In this example, cash payments are expected to be $24,480 for January, 39,540 for February, $56,470 for March, and $66,570 for April.

Jonick Corporation also anticipates the following cash-related transactions will take place during the first four months the business operates.

1. The company will issue stock for $50,000 cash in January.
2. The company will purchase equipment for $8,000 cash in January.
3. The company will purchase equipment for $12,000 cash in February.
4. The company will sell equipment for $3,000 in March.
5. The company will pay $1,000 in cash dividends in March.

Based on the information about Jonick Corporation’s anticipated cash inflows and outflows, the following cash budget can be prepared for the first four months of operations.

Cash Budget

	January	February	March	April
Estimated cash receipts:
\(\ \quad \quad\)Cash sales	$13,600	$18,000	$24,800	$27,800
\(\ \quad \quad\)Collection of accounts receivable	54,400	72,000	99,200	111,200
\(\ \quad \quad\)Issuance of stock	50,000
\(\ \quad \quad\)Sale of equipment			3,000
\(\ \quad \quad\quad \quad\)Total estimated cash receipts	$118,000	$90,000	$127,000	$139,000
Estimated cash payments:
\(\ \quad \quad\)Cash purchases	$10,200	$13,500	$18,600	$21,000
\(\ \quad \quad\)Payment of accounts payable	23,800	31,500	43,400	49,000
\(\ \quad \quad\)Purchase of equipment	8,000	12,000
\(\ \quad \quad\)Payment of dividends				$1,000
\(\ \quad \quad\quad \quad\)Total estimated cash payments	$42,000	$57,000	$62,000	$71,000
Cash increase	76,000	33,000	65,000	68,000
Cash at beginning of the month	0	76,000	33,000	65,000
Cash at end of the month	$76,000	$109,000	$98,000	$133,000