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FINANCIAL MANAGEMENT
CHECK POINT 48: CASH BUDGET

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1. what is a cash budget?
2. advantages of a cash budget
3. the cash budgeting process
4. classification of cash inflows
5. classification of cash outflows
6. cash budget sources
7. debtors and creditors age analysis
8. small business example
debtors and creditors age analysis
9. completion of a cash budget
10. small business example
cash budget
11. for serious business owners only
12. the latest information online
 

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FINANCIAL MANAGEMENT
CHECK POINT 48: CASH BUDGET

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1. what is a cash budget?
2. advantages of a cash budget
3. the cash budgeting process
4. classification of cash inflows
5. classification of cash outflows
6. cash budget sources
7. debtors and creditors age analysis
8. small business example
debtors and creditors age analysis
9. completion of a cash budget
10. small business example
cash budget
11. for serious business owners only
12. the latest information online
 

DO I NEED TO KNOW THIS CHECK POINT?

 

WELCOME TO CHECK POINT 48

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HOW CAN YOU BENEFIT FROM CHECK POINT 48?

 
The main purpose of this check point is to provide you and your management team with detailed information about a Cash Budget and how to apply this information to maximize your company's performance.
 
In this check point you will learn:
 
• What is a cash budget?
• About advantages of a cash budget.
• About the cash budgeting process.
• About three types of activities related to the statement of cash flows.
• About classification of cash inflows.
• About classification of cash outflows.
• About cash budget sources.
• About debtors and creditors age analysis.
• How to prepare creditors and debtors age analysis?
• How to complete a cash budget... and much more.
 

LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 48

 
You and your management team should become familiar with the basic Lean Management principles, guidelines, and tools provided in this program and apply them appropriately to the content of this check point.
 
You and your team should adhere to basic lean management guidelines on a continuous basis:
 
Treat your customers as the most important part of your business.
Provide your customers with the best possible value of products and services.
Meet your customers' requirements with a positive energy on a timely basis.
Provide your customers with consistent and reliable after-sales service.
Treat your customers, employees, suppliers, and business associates with genuine respect.
Identify your company's operational weaknesses, non-value-added activities, and waste.
Implement the process of continuous improvements on organization-wide basis.
Eliminate or minimize your company's non-value-added activities and waste.
Streamline your company's operational processes and maximize overall flow efficiency.
Reduce your company's operational costs in all areas of business activities.
Maximize the quality at the source of all operational processes and activities.
Ensure regular evaluation of your employees' performance and required level of knowledge.
Implement fair compensation of your employees based on their overall performance.
Motivate your partners and employees to adhere to high ethical standards of behavior.
Maximize safety for your customers, employees, suppliers, and business associates.
Provide opportunities for a continuous professional growth of partners and employees.
Pay attention to "how" positive results are achieved and constantly try to improve them.
Cultivate long-term relationships with your customers, suppliers, employees, and business associates.

1. WHAT IS A CASH BUDGET?

CASH BUDGET

Business owners and financial managers must be familiar with the cash budgeting process, which represents one of the most critical management responsibilities in every business organization.

One of the major tasks of the financial manager is to ensure that funds are available when needed by the company. This necessitates detailed examination of Cash Requirements and identification of Sources Of Cash for a specific fiscal period. As a result of such an investigation, the financial manager is expected to develop a comprehensive Cash Flow Projection or Cash Budget.

The cash budget represents an important stage in the financial planning process and is an integral part of the Master Budget. The cash budget provides a period-by-period projection of the following cash flow parameters outlined below.

CASH FLOW PARAMETERS

1.

The Opening Bank Balance.
Expected cash on hand at the start of the budgeted period, or the opening bank balance.

2.

Cash Receipts.
Expected cash receipts during the budgeted period.

3.

Cash Disbursements.
Expected cash disbursements during the budgeted period.

4.

The Closing Bank Balance.
Expected cash on hand at the end of the budgeted period, or the closing bank balance

 

ADDITIONAL INFORMATION ONLINE

What Is Cash Flow By FreshMoneyStudio.
How To Make A Cash Budget By MrHero4U.
Importance Of Cash Flow And Liquidity By Jerry Pradier.
The Importance Of Cash Flow By Matt Alanis, Alanis Business Academy.
Why Is Cash Budget Important To A Small Business By C. McPeak, SCMBDC.

2. ADVANTAGES OF A CASH BUDGET

CASH BUDGET

An accurate Cash Budget is of paramount importance to the effective functioning of a company. Some of the major advantages provided by a cash budget are outlined below.

ADVANTAGES OF A CASH BUDGET

1.

It summarizes all cash receipts and disbursements pertinent to the company's activities.

2.

It helps to identify periods when the company may experience a cash surplus so that additional funds may be invested in a planned manner at the most favorable interest rates.

3.

It helps to identify periods when the company may experience a cash shortage so that additional loans may be negotiated in advance and obtained at the most favorable interest rates and repayment conditions.

4.

It describes the company's liquidity to banks and other financial institutions.

5.

It helps to determine whether the company can commit itself to new capital expenditures without raising additional funds.

3. THE CASH BUDGETING PROCESS

THE CASH BUDGETING PROCESS

A cash budget preparation, or a Cash Budgeting Process, entails dealing with several issues outlined below.

THE CASH BUDGETING PROCESS TASKS

1.

Selection of the purpose and the period for which finance is required.

2.

Computation of the amount of funds required.

3.

Selection of appropriate sources of funds.

There are three major types of company activities that should be considered when computing the amount of funds required during a particular fiscal period. These activities have been classified earlier in the Statement Of Cash Flows and are outlined below.

Important Note:

You must remember that the Statement Of Cash Flows and the Cash Budget are two different financial documents and both are very important for every business organization.

THREE TYPES OF ACTIVITIES RELATED TO THE STATEMENT OF CASH FLOWS

1.

Operating Activities.
These include transactions that relate to the determination of net income, i.e. revenues received from customers, interest received from investments,   manufacturing costs, operating expenses, interest, and tax expenses.

2.

Investing Activities.
These include only transactions that relate to the purchase or sale of capital assets and marketable securities, and advance or collection of loans to and from borrowers.

3.

Financing Activities.
These include only transactions that relate to obtaining and returning funds from and to shareholders and creditors.

As a result of these activities, certain amounts of cash will flow into and out of the company, as explained in this check point.

A cash budget can be completed manually or by using a specific accounting software program.
 
POPULAR ACCOUNTING SOFTWARE PROGRAMS
There are several excellent Accounting Software Programs available to small business owners at present. Some of the most popular accounting software packages are presented below:

• Sage One

• QuickBooks Intuit

• FreshBooks

• Harvest Software Systems

• NetSuite

Various accounting software programs may include additional functions, depending on each specific package. This is discussed in detail in Integrated Financial Management in Tutorial 3.

ADDITIONAL INFORMATION ONLINE

Cash Budget Part 1 Sales Budget And Sales Collections By iNinjaNotes.
Cash Budget Part 2 With Cash Disbursements For Inventory By iNinjaNotes.
Cash Budget Part 3 And Cash Operating Expenses by iNinjaNotes.
Cash Budget Part 4 And Final Cash Disbursements By iNinjaNotes.
Cash Flow Software By Sandra Simmins.

4. CLASSIFICATION OF CASH INFLOWS

CASH INFLOWS

The cash budget preparation process should take into account the anticipated Cash Inflows into the company during the budgeted period. The cash inflows are classified below.

CLASSIFICATION OF CASH INFLOWS

1.

Cash Inflows From Operating Activities.
The receipts from sales of goods or rendering of services to customers and receipts of interest or dividends on loans and investment.

2.

Cash Inflows From Investing Activities.
The proceeds from the sales of property, equipment, and other capital assets, and the proceeds from the sale of marketable securities, and the collection of loans from  borrowers.

3.

Cash Inflows From Financing Activities.
The proceeds from the sale of stock to shareholders and the receipt of loans from creditors.

5. CLASSIFICATION OF CASH OUTFLOWS

CASH OUTFLOWS

The cash budget preparation process should also take into account the anticipated Cash Outflows from the company during the budgeted period. The cash outflows are classified below.

CLASSIFICATION OF CASH OUTFLOWS

1.

Cash Outflows From Operating Activities.
The payments of salaries and wages to employees, for purchasing goods and services from suppliers, for general operating expenses, for interest on debt, and for taxes.

2.

Cash Outflows From Investing Activities.
The payments for purchasing property, equipment, and other capital assets and for purchasing marketable securities and advance of loans to borrowers.

3.

Cash Outflows From Financing Activities.
The payments for re-acquiring stock from shareholders, for repayment of debt to creditors, and for dividends to shareholders.

6. CASH BUDGET SOURCES

THE CASH BUDGETING PERIOD

Cash Budgets are prepared in advance for monthly, quarterly, semi-annual, and annual periods.

The Cash Budgeting Process starts with the examination of the budgeted income statement for the corresponding period.

The Budgeted Income Statement summarizes revenue and expenditure projections pertinent to the company's planned operating activities. The information contained in this statement may be obtained from several sources and it is subsequently used in the budgeting process.

CASH BUDGET SOURCES

1.

Sales Budget.
This budget provides revenue projections from cash and credit sales.

2.

Production Budget (Cost Of Sales Budget).
This budget provides direct material, direct labor, sub-contracting service, and plant overhead cost projections.

3.

Operating Expenses Budget.
This budget provides selling, administrative, and general expenses projections.

7. DEBTORS AND CREDITORS AGE ANALYSIS

COMPANY'S POLICY REGARDING COLLECTION 
OF REVENUES AND PAYMENT OF DISBURSEMENTS

The Cash Budget Preparation Process should also take into account the company's  policy and subsequent actions pertinent to collection of revenues arising from credit sales and payment of disbursements arising from credit purchases. It is essential, therefore, to take into consideration Debtors Age Analysis and Creditors Age Analysis illustrated below.

The information contained in both types of reports needs to be summarized for a full fiscal period to determine Annual Average Percentages pertinent to collection of revenues or Accounts Receivable, and to payment of Accounts Payable or disbursements. This information is illustrated in an example below.

DEBTORS AND CREDITORS AGE ANALYSIS

 

Monthly
Debtors Age Analysis Report

 

Monthly
Creditors Age Analysis Report

All outstanding amounts owed to the company by its customers, termed   Accounts Receivable, are classified in Monthly Debtors Age Analysis Report on the basis of 1-30, 31-60, 61-90 days and over 90 days.

 

All outstanding amounts owed by the company to its suppliers, termed Accounts Payable, are classified in Monthly Creditors Age Analysis Report on the basis of 1-30, 31-60, 61-90 days and over 90 days.

8. SMALL BUSINESS EXAMPLE
DEBTORS AND CREDITORS AGE ANALYSIS

DEBTORS AND CREDITORS AGE ANALYSIS

Company Name: ABC Manufacturing Company
The Budget Period: January 1, 2014 - December 31, 2014

Debtors Age Analysis

Creditors Age Analysis

Outstanding Period

Percentage

Outstanding Period

Percentage

Cash

10%

Cash

20%

1 - 30 days

30%

1 - 30 days

40%

31 - 60 days

30%

31 - 60 days

10%

61 - 90 days

20%

61 - 90 days

25%

Over 90 days

10%

Over 90 days

 5%

  Total 

100%

  Total 

100%

9. COMPLETION OF A CASH BUDGET

COMPLETION OF A CASH BUDGET

The next stage in the cash budgeting process entails examination of the Capital Expenditure Budget and identification of time and values of individual disbursements. 

Each capital expenditure disbursements must be entered into the cash budget in accordance with the respective payment date. Furthermore, it is necessary to identify periods or dates for all lump-sum payments such as taxes, interest, loan repayment, or vacation pay and to enter relevant amounts into the cash budget.

A simplified example of a Quarterly Cash Budget is illustrated below. This budget also incorporates the information contained in the debtors and creditors age analysis described above.

10. SMALL BUSINESS EXAMPLE
CASH BUDGET

CASH BUDGET

Company Name: ABC Manufacturing Company
 The Budget Period: January 1, 2014 - March 31, 2014

11. FOR SERIOUS BUSINESS OWNERS ONLY

ARE YOU SERIOUS ABOUT YOUR BUSINESS TODAY?

Reprinted with permission.

12. THE LATEST INFORMATION ONLINE

 

LESSON FOR TODAY:
A Weekly Cash Budget Is Just Something To Help
You Explain Why Money Will Run Out By Tuesday!

Ervin L. Glaspy

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