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7.10: Cash Budget

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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

 Budgeted cash sales (20%)

13,600

18,000

24,800

27,800

 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

 Budgeted cash purchases (30%)

10,200

13,500

18,600

21,000

 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:

       

 Cash sales

$13,600

$18,000

$24,800

$27,800

 Collection of accounts receivable

54,400

72,000

99,200

111,200

 Issuance of stock

50,000

     

 Sale of equipment

   

3,000

 

 Total estimated cash receipts

$118,000

$90,000

$127,000

$139,000

Estimated cash payments:

       

 Cash purchases

$10,200

$13,500

$18,600

$21,000

 Payment of accounts payable

23,800

31,500

43,400

49,000

 Purchase of equipment

8,000

12,000

   

 Payment of dividends

     

$1,000

 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


This page titled 7.10: Cash Budget is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform.

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