Blueprint Problem: Master Budget-The Financial Budget

Basics of the Cash Budget

Once the operating budget is complete, the financial budget can be developed. The financial budget consists of the budgets pertaining to the inflows and outflows of cash and of financial position. These budgets include: the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows.

Of these three budgets, the most important is the cash budget. Matching the cash inflows and outflows over the course of the year is critically important for companies. Shortages of cash can lead to bankruptcy even for firms that have positive operating income. Thus, nearly all firms develop cash budgets to monitor cash inflows and outflows. They will compile monthly cash budgets or even weekly cash budgets should it become necessary.

In its simplest format, a cash budget consists of cash inflows minus cash outflows .

Beginning cash balance

Plus: cash inflows

Cash available

Less: cash outflows

Ending cash balance

Note that this format is very similar to a checking account. We start with the beginning cash balance, add any expected cash inflows to get total cash available. From the cash available, we subtract expected cash outflows to determine the ending cash balance. The ending cash balance for one month is beginning cash balance for the next month .

Determining cash inflows can be complicated by the existence of outstanding accounts receivable. Customers rarely pay their entire balance in the month incurred. Therefore it is necessary to create an accounts receivable aging schedule to determine what, based on past experience, the amount of cash expected in a particular month will be.

Derby Company had the following collection patterns with its accounts receivable:

40% in the month of sale

30% in the month following sale

25% in the second month following sale

Derby provided the following data on expected sales revenue:

March	$80,000
April	90,000
May	100,000
June	95,000
July	105,000

How much cash from payments on accounts receivable does Derby expect in May and June? If an amount box does not require an entry, enter "0" or leave the cell "blank".

	May		June
From payments on sales in:
March	$
April
May
June
Total	$		$

The percentages that will be paid on accounts receivable total 95%. The remaining 5% is never paid back and is represented by allowance for uncollectible accounts . Suppose that 30% of accounts receivable were paid back in the month of sale and 40% were paid in the month following sale, how would that affect cash received is cash received would be paid later but would still be received

Payments on accounts payable may need similar treatment as a firm may pay those off over two or months. Suppose that the firm typically pays 40% of its purchases of raw materials in the month incurred and 60% in the following month. Data from raw materials purchases is as follows:

March	$30,000
April	36,000
May	40,000

What are the cash payments for raw materials budgeted to be paid in April and May? If an amount box does not require an entry, enter "0" or leave the cell "blank".

	April		May
March	$		$
April
May
Total	$		$

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The Cash Budget

Once we see how the components of the cash budget are calculated, it is just a matter of putting together an entire cash budget. It almost seems redundant to say, but a cash budget includes only cash items. So if a company makes sales on account, those are not included in the cash budget until cash is received on account. Similarly, a company may have non cash expenses. These are not included in the cash budget.

A company expects sales of $100,000 in July and expects sales of $115,000 in August. The company provided the following information:

a. Sales in the previous three months were:

April	$88,000
May	90,000
June	95,000

Of the sales, 10% are cash sales, the remaining are on account. The company experiences the following accounts receivable payment pattern: 25% in the month of sale, 50% in the month after sale, 20% in the second month after sale.

b. Purchases of goods are made the month before the anticipated sale at a rate of 60% of sales. Of monthly purchases, 25% are paid in the month of purchase, and the remaining 75% in the following month.

c. Wages for staff total $6,450 per month.

d. Telecommunications and utilities are $1,900 per month.

e. The property tax bill of $6,000 is due in August.

f. Insurance is paid quarterly at $1,200 per quarter. The next payment is due July 15.

g. Depreciation is $2,000 per month.

h. Advertising is budgeted at $2,000 per month in the summer months.

i. Professional fees (legal, bookkeeping, etc.) average $600 per month.

j. Maintenance is $800 per month.

k. Office supplies average $150 per month.

l. The owner took out a loan from her family and is paying it back at the rate of $4,000 per month.

m. The cash balance on July 1 was $2,190.

Develop a cash budget for July by filling in the following table. If an amount box does not require an entry, enter "0" or leave the cell "blank".

Beginning cash balance, July 1			$
Add: Cash sales
Payments on accounts receivable:
May	$
June
July
Cash available			$
Cash Disbursements:
Purchases	$
Wages
Telecommunications
Property tax
Insurance
Depreciation
Advertising
Professional fees
Maintenance
Office supplies
Loan payment
Total disbursements			$
Cash balance, July 31			$

Why is property tax zero? Property Taxes are to be Paid in August - not July .

Why is depreciation zero? Depreciation is a Noncash Expense .

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The Budgeted Balance Sheet and Statement of Cash Flows

The budgeted balance sheet and budgeted statement of cash flows are pro forma statements. In other words, they are not based on historical values but instead are based on budgeted or expected numbers and presented in the correct format.

The budgeted balance sheet shows the expected liabilities and owner's equity for the coming year .