Cash Flow Budget

10 Key excerpts on "Cash Flow Budget"

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  eBook - PDF

  Managing Cash Flow

  An Operational Focus

  • Rob Reider, Peter B. Heyler(Authors)
  • 2003(Publication Date)
  • Wiley

    (Publisher)

  Since cash budgeting can be handled essentially within the financial manager’s office, most of the excuses for not preparing an operating budget do not apply. And the criti- cal nature of cash availability dictates that some form of cash plan or budget be prepared. The typical business does not usually generate a sale in direct exchange for cash—the sale is made in return for the customer’s promise to pay within agreed-upon selling terms (thereby creating an account receivable). The busi- ness purchases its needed materials (e.g. inventory) and operating expenses on the same basis—with a promise to pay at some agreed-upon time in the future (thereby creating accounts payable or accrued expenses). These economic trans- actions do not immediately affect the business’s cash flow. The cash flow occurs at the time of payment—either when cash is received or disbursed. Effective 268 Planning Cash Flow cash flow control must clearly identify and manage the timing differences between the economic and the cash transactions. The goal of cash conversion is to convert business activities to cash as quickly as feasible. Do whatever possi- ble to maximize cash sales, reduce the collection period, eliminate non-value- added costs, and eliminate transactions where the processing cost exceeds the amount of the transaction. The Cash Flow Budget projects the cash receipts and disbursements expected in the normal course of business, taking into account the actual time that cash flows in and out. This budgeting process can be divided into the following com- ponents: • Forecasting sales • Projecting cash receipts • Projecting cash disbursements • Projecting cash balances • Managing cash shortfalls and excesses Forecasting Sales The sales plan or forecast is the foundation of the Cash Flow Budget. The more accurate the sales forecast, the more accurate will be the Cash Flow Budget.

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  Financial Accounting (RLE Accounting)

  An Introduction

  • John Blake(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  One possible solution to a short-term cash shortage revealed by a cash budget is to negotiate a bank overdraft facility; in such a case a cash budget is an essential document to present to the bank as part of the loan application. Any knowledgeable lender is likely to insist on production of a cash budget, sometimes called a ‘cash flow forecast’, when considering a loan application.

  When preparing the cash budget the accountant will need to be aware of the plans for each department of the business, and will compute the amount and timing of the cash flows relating to each transaction. The forecast sales are likely to be of particular significance, since these affect not only the amounts to be raised from debtors but will also be related to production, selling, and distribution costs.

  Under examination conditions the amount of data relating to forecasts provided will necessarily be restricted. Examination questions on cash budgets are often used by examiners as an opportunity to test the student's grasp of accounting principles, in recognizing the relationship between cash flow and the amounts reported in the accounts.

  Example 32 offers an illustration of the way in which a question on cash budgets might be presented; the period of two months is shorter than normally required, and has been chosen to simplify the illustration.

  Figure 70 shows how the cash budget would be presented. A column is shown for each month covered. Forecast inflows are totalled, forecast outflows are totalled, so that the net inflow or outflow can be computed. The cash balance brought forward is then adjusted to reflect the net inflow or outflow, and the new cash balance is carried forward to the following month.

  Figure 70

  The workings prepared in drawing up the cash budget are shown in Figure 71 . The steps taken are:

  1

  The estimate of future sales is the basis of computing the expected cash inflows from debtors; in so far as a proportion of bad debts is expected, it follows that no cash inflow will arise from that part of sales. The workings in Figure 71 show the way in which the cash inflow from debtors for each month would be computed.

  2

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  Canadian Public-Sector Financial Management

  Second Edition

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

    (Publisher)

  For many government organizations, the question of cash inflows is not one that they have to address. Budgets are set, and the manager does not have to be concerned about finding the money to meet the obligations. As already noted, management of revenue inflows through taxes and other means is a treasury function that is attended to on their behalf. Their focus, then, will be on the other side of cash flows: the expenditure side.

  This chapter is concerned with the cash management of expenses that are detailed in the organization’s operating budget. This usually encompasses funds for staff salaries and benefits, supplies, equipment, and operational funds, whether they are for disbursements to individuals, various elements of the care and support to clients, or the purchase of services to meet program objectives. Although cash-flow planning for individual capital projects is not included in this, the principles remain similar.

  Managers often see budget-plan forecasts as difficult to make and, to some extent, unrealistic. They also characterize them as straitjackets in which managers are held to account for the financial performance of their operations despite many unpredictable and uncontrollable elements. In other words, forecasts are seen as meeting some financial needs, but having very little to do with the real world of day-to-day operations. There can be some truth in this, which makes it important to build reporting systems that are both useful and realistic. This takes the collaborative efforts of managers, senior leaders, and financial advisors working together over time, with respect for the challenges each faces. Through this process, they can arrive at a consensus about the forecasting efforts, their use and relevance, and their continuing credibility. Such an effort can be hard work for an organization that faces operational and financial challenges. Failure to make the effort means loss of control over one of the key elements of getting the work done – the money.

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  Solutions

  Business Problem Solving

  • Frank Fletcher, Eric Bolland(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  capital budget predicts what the company will spend on fixed assets such as buildings, machinery and equipment, etc. It includes the cost of acquisition of new assets as well as the maintenance and replacement of existing assets.

  • A special projects budget will forecast costs associated with a particular upcoming company project. These costs may include materials, labor and other expenses.

  • The Cash Flow Budget estimates the company’s future cash flows over a particular period. The Cash Flow Budget is particularly important to help a company estimate when it may need to use outside financing sources or tap into reserves to cover a cash shortfall in a particular period. We’ll talk about the cash conversion cycle and financing options later in this chapter.

  In this traditional series of activities, the finance manager generally oversees the process. It might work something like this. At the beginning of the process, senior management meets to develop business targets based on company strategy. The finance manager pulls together historical data for each area and presents each business unit manager with a package. This package may include historical financial data, a budget template, new corporate goals and objectives, and a deadline for when the budget numbers are due back to the finance department. The finance manager will collect the completed budget templates and will combine them into a master budget. This budget is presented to senior management.

  And that’s where the fun begins. What follows is often an exercise in negotiation as opposed to an exercise in forecasting a realistic budget. Beware of the following pitfalls in the budget negotiating process:

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  Financial Management in Construction Contracting

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

    (Publisher)

  As well as the formal record included with the profit and loss statement and balance sheet, a company should provide a Cash Flow Budget or forecast. This can be defined as an estimate of the timing and amounts of cash inflows and outflows over a specific period (usually one year). A cash flow forecast shows if a firm needs to borrow, how much, when, and how it will repay the loan. It provides vital information on the efficiency of the firm and also allows the firm time to plan if it requires to source finance.

  Cash inflows are the receipt of cash into a business. They would include payment for work complete, interim payments for continuing work, payment for materials on site and payment from other organisations for services offered.

  The cash outflows are the transfer of cash from the business to creditor organisations. This would include payment for materials, subcontract payments, staff salaries, repayment of loans as well as purchase of capital equipment.

  The net monthly cash flow is simply the balance of a month’s total cash inflows in relation to the months total cash outflows. Businesses need to forecast the cash flow on a monthly basis to allow them to predict their finance requirements and to estimate whether they have the capacity to undertake additional work in the future.

  11.3.3 Client and contractor

  A construction project client does not use a cash flow projection in the same way as a contractor, as generally the funding has been secured prior to the project commencing and the client ‘draws down’ from the fund to pay interim valuations. The client therefore only requires an estimate of the monthly amounts that will need to be paid. These amounts will often include costs for site acquisition, planning and design team fees, which will be incurred well before the construction project commences. A client’s quantity surveyor (QS) can use fairly unsophisticated techniques to model the cash requirements of the client.

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  Cornerstones of Cost Management

  • Don Hansen, Maryanne Mowen(Authors)
  • 2017(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  All the remaining operating budgets found in a manufacturing organization, however, have counterparts in service organizations. A not-for-pro fi t service organiza-tion ’ s income statement is replaced by a statement of sources and uses of funds. Once the operating budgets are complete, the fi rm can construct the fi nancial budgets. PREPARING THE FINANCIAL BUDGET The remaining budgets found in the master budget are the fi nancial budgets. Typical fi nancial budgets include the budget for capital expenditures, the cash budget, the bud-geted balance sheet, and the budgeted statement of cash fl ows. While the master budget is a plan for one year, the capital expenditures budget is a fi nancial plan outlining the expected acquisition of long-term assets and typically covers a number of years. Decision making in regard to capital expenditures is considered in Chapter 19. Details on the budgeted statement of cash fl ows are appropriately reserved for another course. Accordingly, only the cash budget and the budgeted balance sheet will be illustrated here. The Cash Budget Understanding cash fl ow is critical to managing a business. Often, a business can suc-cessfully produce and sell a product but fails because of timing problems associated with cash in fl ows and out fl ows. By knowing when cash de fi ciencies and surpluses are likely to occur, a manager can plan to borrow cash when needed and to repay the loans dur-ing periods of excess cash. Bank loan of fi cers use a company ’ s cash budget to document the need for cash, as well as the company ’ s ability to repay. Because cash fl ow is the life-blood of an organization, the cash budget is one of the most important budgets in the master budget. Components of the Cash Budget The cash budget is the detailed plan that shows all expected sources and uses of cash. The cash budget, illustrated in Exhibit 8.4, has the following fi ve main sections: 1. Total cash available 2. Cash disbursements 3. Cash excess or de fi ciency 4.

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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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  Cost Management

  Measuring, Monitoring, and Motivating Performance

  • Leslie G. Eldenburg, Susan K. Wolcott, Liang-Hsuan Chen, Gail Cook(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  Similarly, cash flows related to long-term debt and capital stock are planned in the long-term financing budget, but the changes in cash flows need to be reflected in the cash budget. Short-Term Borrowing or Investing Managers typically use short-term loans or investments to balance the cash budget, taking into account the desired cash balance. Short-term loans may be prearranged as a line of credit with a financial institution so that the organization can borrow up to a specified amount as needed to cover cash shortages. Organizations often use excess cash to repay short-term debt, with any remainder placed in liquid investments. The purpose of the cash budget is to ensure adequate levels of cash for day-to-day operations. If an organization lacks the necessary cash to fund its operations at any given moment, then it is insolvent. Successful new, fast-growing companies, especially fran- chise companies or companies growing by acquisition, sometimes fail because they have no liquid assets and cannot pay their employees. At the same time, companies such as Air Canada are able to continue operating, even when they are legally bankrupt and are incurring losses, because their assets are liquid; they are able to sell nonliquid assets for cash, or they are able to obtain the additional financing needed to stay in business while they restructure. 5 To prepare a cash budget, three types of cash transactions are planned: 1. Cash receipts 2. Cash disbursements 3. Short-term borrowings or investments Mountain High Bikes, Part 2, demonstrates the preparation of a cash budget. 5 See, for example, Simon, Bernard, “Air Canada Is Granted Bankruptcy Court Protection,” NY Times online, April 2, 2003, http://www.nytimes.com/2003/04/02/business/air-canada-is-granted-bankruptcy-court-protection.html; “Air Canada granted bankruptcy protection,” CBC News online, Dec. 4, 2003, http://www.cbc.ca/news/business/ air-canada-granted-bankruptcy-protection-1.366723.

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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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  How to Read a Financial Report

  Wringing Vital Signs Out of the Numbers

  • John A. Tracy, Tage C. Tracy(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Part One FUNDAMENTALS 1 STARTING WITH CASH FLOWS 4 Starting with Cash Flows Savvy business managers, lenders, and investors pay a lot of atten-tion to cash flows . Cash inflows and outflows are the pulse of every business. Without a steady heartbeat of cash flows, a business would soon have to go on life support—or die. So, we start with cash flows. Cash inflows and outflows appear in a summary of cash flows. For our example in Exhibit 1.1, we use a business that has been operating for many years. This established business makes profit regularly and, equally important, it keeps in good financial condi-tion. It has a good credit history and banks lend money to the busi-ness on competitive terms. Its present stockholders would be willing to invest additional capital in the business, if needed. None of this comes easy. It takes good management to make profit consistently, to secure capital, and to stay out of financial trouble. Many busi-nesses fail these imperatives, especially when the going gets tough. Exhibit 1.1 summarizes the company’s cash inflows and out-flows for the year just ended, and shows two separate groups of cash flows. First are the cash flows of its profit-making activities— cash inflows from sales and cash outflows for expenses. Second are the other cash inflows and outflows of the business—raising capi-tal, investing capital in assets, and distributing some of its profit to shareowners. We assume you’re fairly familiar with the cash inflows and out-flows listed in Exhibit 1.1. Therefore, we are brief in describing the cash flows at this early point in the book: Summary of Cash Flows for a Business ◆ ◆ The business received $51,680,000 during the year from selling products to its customers. It should be no surprise that this is its largest source of cash inflow. Cash inflow from sales revenue is needed for paying expenses. During the year the company paid $34,760,000 for the products it sells to customers.

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