Cash Budgeting

10 Key excerpts on "Cash Budgeting"

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  Strategic Managerial Accounting

  Hospitality, Tourism & Events Applications

  • Tracy Jones, Helen Atkinson, Angela Lorenz, Peter Harris(Authors)
  • 2012(Publication Date)
  • Goodfellow Publishers

    (Publisher)

  A cash budget solely records cash income and expenditure when cash changes hands, not when it is incurred. A cash budget gives a useful overview of the inflow and outflow of cash in the budgeted period. This can forewarn management as to when cash is short, when an overdraft needs to be arranged, etc. Equally, in times of plentiful cash, short-term investments might be considered to keep the cash working for the business. In seasonal businesses, as are common in these sectors, Cash Budgeting can be critical to survival through the peaks and troughs of the business. If an events company focuses on weddings the peak period will be over the summer, similar to the peak tourism season, but whilst more cash comes in during this period expenditure on core business elements are year-long and cash is needed for these. In some non-commercial organisations, government funded or smaller chari-ties, for example, the cash budget can be the key recording tool for the operation. 9.3.4 Example of preparing a budget (existing business) The following example uses a hotel with three key operating departments (rooms, food and beverages). The same process can be followed for any hospitality, tour-ism or events organisation and the number of operating departments can be increased or decreased as necessary in a specific situation. It also shows examples of operating departments with and without cost of sales, which is important when trying to apply in other similar contexts. Pallas International Hotel uses incremental budgeting, so uses last year’s data as a starting point for its budget. In this example the known trading facts are already approved and individual budgets are supplied. This example begins by showing the statement of financial position (Table 9.1), and then the planned changes are applied.

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  Canadian Public-Sector Financial Management

  Second Edition

  • Andrew Graham(Author)
  • 2014(Publication Date)
  • McGill-Queen's University Press

    (Publisher)

  Cash management is not a way to re-open the budget decisions but to adapt to changing circumstances. It encompasses the various elements necessary to effectively manage the assigned budget of a unit within the year over which it is to be implemented. This means that some of the keys to good cash management are:

  •Effective cash-flow projections and forecasting in order to assess the organization’s performance against plan and budget.

  •Reports to the appropriate authorities to alert them to changes, confirm that the budget will be spent according to plans, release surplus funding for reallocation, and monitor managerial performance to make adjustments in the short term.

  •Governance procedures to ensure timely review of financial and performance information and to make decisions to adjust programs, reassess budgets, or find alternative strategies such as increasing cash available or reallocating unneeded funds.

  This definition stresses that cash management is a formal process or system. In our personal finances, most of us keep an eye on how much money we have, how much we need, and whether there is a gap. We also look to build savings or other non-current assets to deal with contingencies, emergencies or opportunities as they arise. For most budget managers, the same is true. They generally know what their budget is, how they expect to spend it, and whether or not they have the funds, resources, or cash to meet their obligations as part of that plan. Like a private individual, many public sector managers, especially those in smaller agencies, depend on transfers from funding governments or a fee-based income flow, and will also keep an eye on their liquidity to, as noted above, simply be able to meet payroll and pay the bills.

  Of course, cash-management strategies can be more complex and formal than the actions of a single prudent manager. They involve the systems that organizations use to manage their in-year budgets to maximum effect. They range from the manager’s concerns, as just outlined, to the preoccupation of the financial advisor or controller with ensuring that adequate monitoring of budget behaviour based on reliable financial and operational information will properly signal to the senior manager that those in the organization are operating within their funding authorities, that the plans laid out in the approved budget are unfolding as anticipated, that changes are being managed or recognized, that surpluses are identified for reallocation, and that managers are performing well. Hence, there is a need for formal reporting and structures. Cash management, for all this, is part of the overall management framework of an organization. Figure 10.1

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  Accounting

  Business Reporting for Decision Making

  • Jacqueline Birt, Keryn Chalmers, Suzanne Maloney, Albie Brooks, David Bond, Judy Oliver(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  9.5 The cash budget LEARNING OBJECTIVE 9.5 Prepare a schedule of receipts from accounts receivable and a cash budget. Another important budget that is prepared is the cash budget. A cash budget is a statement of expected future cash receipts and cash payments, and enables the calculation of expected cash balances. A cash budget prepared on a month-by-month basis over the budget period is preferable, as it provides more timely information and enables closer monitoring of the cash position. The cash budget is a key component of the master budget and assists decision making by: • documenting the timing of all estimated cash receipts and cash payments • helping to identify periods of expected cash shortages, so corrective action can be taken • helping to identify periods of expected cash surpluses, so short-term investments can be considered • identifying suitable times for the purchase of non-current assets • assisting with the planning and use of borrowed funds • providing a framework for ‘what if’ analysis. Like the statement of cash flows studied in the related chapter, the cash budget focuses on cash- related items. Cash is the lifeblood of any entity. Consequently, the use of the cash budget as a planning tool is critical in terms of providing direction, and setting financial targets and benchmarks against which performance will be evaluated. When prepared on spreadsheets, the cash budget allows alternative scenarios on the cash position of the entity to be considered. The preparation of a cash budget will identify any liquidity issues and ensure that the entity always has access to cash either through operating activities or, if needed, financing. Illustrative example 9.11 demonstrates the preparation of a cash budget for Coconut Plantations Pty Ltd. ILLUSTRATIVE EXAMPLE 9.11 Preparation of a cash budget Coconut Plantations Pty Ltd is a small manufacturer of coconut-based products for sale to wholesalers and retailers in Australia.

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  Accounting

  Reporting, Analysis and Decision Making

  • Shirley Carlon, Rosina McAlpine, Chrisann Lee, Lorena Mitrione, Ngaire Kirk, Lily Wong(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  Compare actual results to budget. Results are favourable if revenues are equal to or exceed budgeted amounts, or if expenses are equal to or less than budgeted amounts. 17.3 Cash budget LEARNING OBJECTIVE 17.3 Explain and prepare the main sections of a cash budget. The cash budget shows anticipated cash flows. Because cash is so vital, this budget is considered to be the most important consideration in preparing financial budgets. The cash budget contains three sections (cash receipts, cash payments, and financing), and the beginning and ending cash balances as shown in figure 17.10. FIGURE 17.10 Basic form of a cash budget ANY ENTITY Cash budget Beginning cash balance $ XXX Add: Cash receipts (itemised) XXX Total available cash XXX Less: Cash payments (itemised) XXX Excess (deficiency) of available cash over cash payments XXX Financing XXX Ending cash balance $ XXX CHAPTER 17 Budgeting 885 The cash receipts section includes expected receipts from the entity’s main source(s) of revenue such as cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant and equipment, and the issue of shares. The cash payments section shows expected payments for direct materials, direct labour, manufacturing overhead, and selling and administrative expenses. This section also includes projected payments for income tax, dividends, investments, and plant and equipment. The financing section shows expected borrowings and the repayment of the borrowed funds plus interest. This section is needed when there is a cash deficiency or when the cash balance is below management’s minimum required balance. Data in the cash budget must be prepared in sequence because the ending cash balance of one period becomes the beginning cash balance for the next period. Data for preparing the cash budget are obtained from other budgets and from information provided by management.

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  Managing Finance

  • D. Crowther(Author)
  • 2007(Publication Date)
  • Routledge

    (Publisher)

  These requirements need to be considered not just for the start and end of the budget period but on a continual basis throughout the period. For example, a seasonal goods manufacturer, such as a toy manufacturer which sells most of its products in the pre-Christmas trading period, may start and finish its budget year with relatively low stock levels, but during the year will have a large build up of stock which is all sold off at one particular time of year according to its trading cycle. Such a trading pattern has obvious implications as far as working capital budgeting is concerned. The budget process needs to recognise this trading pattern and ensure that sufficient working capital exists throughout the year to finance this stock build-up and ensure that the budget remains feasible.

  Although working capital includes stock and debtors (less creditors), which must all be budgeted for and managed, the primary concern of working capital budgeting is the cash situation of the organisation. The preparation of a cash budget therefore is an essential part of the budgeting process, and it is important to distinguish between profit arising from the activities of the firm and cash. Many firms may be operating profitably but suffer from a shortage of cash at particular periods. In fact a shortage of cash is the principal reason for the failure of seemingly profitable companies. The preparation of a cash budget is therefore a key part of the budgeting process.

  It is not sufficient for a cash budget to be prepared in terms of the total requirements for the budget period, as what is important is to ensure that sufficient cash is available continuously throughout the year to meet the requirements of the business. Equally, however, at certain times of year a surplus of cash may exist within the business and if the budget makes this apparent it is possible for the business to make productive use of this cash rather than having a surplus sitting in its bank account. Thus a cash budget needs to be prepared month by month (or possibly even more frequently if a critical situation exists) in order to identify the maximum cash needs of the business during the period of the budget and to be able to plan to ensure that this cash is available when required. Businesses which fail are much more likely to do so because of a cash shortage than because they are trading unprofitably, and so cash management is a crucial part of business management. The cash budget therefore has a key role to play in the management of a business.

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  Accounting for Managers

  Interpreting Accounting Information for Decision Making

  • Paul M. Collier, Sandy M. Kizan, Eckhard Schumann(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 14 Budgeting LEARNING OBJECTIVES After reading this chapter, you should be able to answer the following questions: ■ What are the benefits of budgeting? ■ What types of budgets are used within organizations? ■ What are the main steps in the budgeting process? ■ How does the budgeting process for a manufacturing organization differ from the budgeting process for a service organization or a retail organization? ■ Why is it important to develop a cash budget? ■ What are the challenges faced when budgeting, and how can these challenges be overcome? Anthony and Govindarajan (2000) described budgets as “an important tool for effective short-term planning and control” (p. 360). They saw strategic planning (see Chapter 6) as being focused on several years, contrasted to budgeting which focuses on a single year. Strategic planning “precedes budgeting and provides the framework within which the an- nual budget is developed. A budget is, in a sense, a one-year slice of the organization’s strategic plan” (p. 361). This chapter explores the process of budgeting for manufacturing, retail, and service or- ganizations and considers the various types of budgets that might be developed. 348 PART II USING ACCOUNTING INFORMATION FOR DECISION MAKING, PLANNING, AND CONTROL What Is Budgeting? A budget is a plan expressed in monetary terms that covers a future time period (typically a year). Budgets are based on a defined level of activity, either expected sales revenue (if market demand is the limiting factor) or capacity (if capacity is the limiting factor). While budgets are typically pro- duced annually, continuous budgets add additional months to the end of the period so that there is always a 12-month budget for the business.

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  Financial Management in Construction Contracting

  • Andrew Ross, Peter Williams(Authors)
  • 2012(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  11

  Financial management

  11.1 Budgetary control 11.2 Definitions 11.2.1 Cost 11.2.2 Value 11.3 Cash flow 11.3.1 Movement of funds 11.3.2 Cash flow forecasting 11.3.3 Client and contractor 11.3.4 Cash flow forecast limitations 11.3.5 Simple forecasting models 11.3.6 Credit terms 11.3.7 Minimum and maximum cash requirements 11.3.8 Capital lock up 11.3.9 Expediting receipts 11.3.10 Delaying payment to suppliers 11.3.11 Project cash flow 11.3.12 Organisational cash flow 11.4 Working capital 11.4.1 Current assets 11.4.2 Current liabilities 11.4.3 Profitability ratio References

  11.1 Budgetary control

  Budgeting and its use in systems of monitoring and control influence a great deal of organisational life. The discussion of organisational cybernetics is beyond the scope of this text; However, anyone who has worked within organisations which use budgets will recognise the adage ‘what gets measured gets attention’. A lot of analogies are used to consider control, the most common mechanistic one being a thermostat (Figure 11.1 ): a standard established through norms, a system of measurement of actual against predicted, a means of communication of this to some mechanism that can take corrective action and, finally, an action taken which is likely to have an effect upon the factors that caused the variation from the standard.

  Figure 11.1 Control, measurement and remedial action.

  This analogy is helpful in understanding a simple control system and can it ­easily be extended to consider budgetary control within construction ­organisations, but it has many shortcomings as it does not reflect the complexity and interconnectivity of organisational systems, human behaviour, the role of measurement and feedback.

  Construction firms have to budget and manage their budgets in dynamic economic environments; the measures they use have to be adapted to a wide range of clients, resource suppliers and project procurement approaches. The link between the corrective actions undertaken and their impact is often uncertain and the individuals who use the systems tend to be from different functional groups, which all have their own organisational subcultures and differing reward and incentive systems.

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  Financial Management NQF4 SB

  TVET FIRST

  • B Brown(Author)
  • 2013(Publication Date)
  • Macmillan

    (Publisher)

  152 Module 13: Explaining the concept of budgeting in a business unit Explaining the concept of budgeting in a business unit When you have completed this Module, you should be able to: • explain the concept of a budget with reference to income and expenditure; • identify and list items that make up gross revenue; • identify and list items that make up expenditure with reference to cost of sales and cash outflows; • explain techniques of budgeting in relation to the type of budget; and • explain the relationship between selected budgeting techniques and the business budget requirements in relation to a specific business. Unit 13 .1: The concept of budgeting Let us start this Module by restating the difference between a budget and an income and expenditure statement: • An income and expenditure statement is a record of the actual total income and expenditure transacted by a business during a given trading period. • A budget is a future plan of the total income and expenditure that is likely to happen in a future trading period, based on: − forecasts; − predictions; and − targets. In the workplace Budgets are usually created by businesses as a plan for the next trading year. You may hear the adage (or saying) that to fail to plan is to plan to fail . Whatever the business in which you are involved, you need to ensure that there is future financial planning. A budget is a plan that outlines the expected total costs of providing a specified level of products. In other words, a budget will state that, if the business is to produce a total output of Rxxxx, we shall require Rxxx to cover the costs involved. Therefore, we can say that a budget is a plan expressing, in monetary terms, what the business will try to make happen! A budget is usually drawn up using past experience, combined with a forecast for the future, to provide the controls necessary for a business to achieve given objectives. Module 13

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  Personal Finance

  • Vickie L. Bajtelsmit(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  3.2 The Role of Cash in Your Financial Plan • Costs and Benefits of Holding Cash • How Much Should You Hold in Cash? • Rules of Effective Cash Management (continued) 3-2 CHAPTER 3 Budgeting and Cash Management 3.1 Developing, Implementing, and Monitoring a Household Budget LEARNING OBJECTIVE 3.1 Develop, implement, and monitor a household budget. You now know how to set financial goals and evaluate your personal financial situation. Unplanned small cash outflows, such as Alicia’s contributions to her friends’ projects in the Feature Story, can interfere with your ability to achieve those goals—that is, unless you’ve included those outflows in your financial plan and budget. In the last chapter, you created a personal balance sheet and a personal cash flow statement in order to evaluate how well you’ve managed your money in the past. In this chapter, you’ll learn how to create a budget, which is a plan for future spending and saving that will enable you to achieve your financial goals. The budgeting process is critical to the success of your financial plan. LEARNING OBJECTIVES TOPICS DEMONSTRATION PROBLEMS 3.3 Identify and evaluate the types of financial institutions that provide cash management services. 3.3 Providers of Cash Management Services • Depository Institutions • Nondepository Institutions • Evaluating Financial Institutions 3.4 Evaluate checking and savings account choices based on liquidity, safety, and cost. 3.4 Evaluating Cash Management Products and Services • Criteria for Evaluating Cash Management Accounts • Checking Accounts • Savings Accounts • The Rule of 72 3.1 Using the Rule of 72 3.5 Select appropriate tools for dealing with cash management problems, and protect yourself from identity theft. 3.5 Resolving Cash Management Problems and Avoiding Identify Theft • Cash Management Problems and Solutions • Identity Theft (continued)

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  Cost Management

  • Don Hansen, Maryanne Mowen, Dan Heitger, , Don Hansen, Maryanne Mowen, Dan Heitger(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  If there is a deficiency, the financing section shows the necessary amount to be borrowed. When excess cash is available, the financing section shows planned repayments, including interest. The final section of the cash budget is the planned ending cash balance. Remember that the minimum cash balance was subtracted to find the cash excess or deficiency. However, the minimum cash balance is not a disbursement, so it must be added back to yield the planned ending balance. Once all sections of the cash budget are understood, it is time to construct one. Example 8.12 shows how and why to prepare the cash budget. EXAMPLE 8.12 Information: The information needed to prepare the cash budget comes from Examples 8.1 through 8.11 and from the following information. a. ABT requires a $100,000 minimum cash balance for the end of each quarter. On December 31, 20x0, the cash balance was $120,000. b. Money can be borrowed and repaid in multiples of $100,000. Interest is 12 percent per year. Interest payments are made only for the amount of the principal being repaid. All borrowing takes place at the beginning of a quarter, and all repayment takes place at the end of a quarter. c. All materials are purchased on account; 80 percent of purchases are paid for in the quarter of purchase. The remaining 20 percent are paid in the following quarter. The purchases for the fourth quarter of 20x0 were $500,000. d. Budgeted depreciation is $200,000 per quarter for overhead, $5,000 for marketing expense, and $12,000 for administrative expense. (Remember that depreciation is not a cash expense and must be deleted from total expenses before the cash budget is prepared.) e. The capital budget for 20x1 revealed plans to purchase additional equipment for $600,000 in the first quarter. The acquisition will be financed with operating cash, supplementing it with short-term loans as necessary. f. Corporate income taxes of $12,600 will be paid at the end of the fourth quarter.

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