From the information below, prepare a cash budget for the period from January to April. The wages to be paid to workers amount to $5,000 each month. Also, the bank balance on 1st January was $8,000. The management decided on the following: From the information below, prepare a cash budget for a company for April, May, and June 2024 in a columnar form. You are further informed that: Cash Budget for 2024 From the following information, prepare a monthly cash budget for the three months ending 31st December 2024.Problem 1
Expected Sales Expected Purchase $ $ Jan. 60,000 Jan. 48,000 Feb. 40,000 Feb. 80,000 Mar. 45,000 Mar. 81,000 Apr. 40,000 Apr. 90,000 Solution
Particulars Jan. Feb. Mar. Apr. Receipts: $ $ $ $ Opening balance 8,000 15,000 - - Sales 60,000 40,000 45,000 40,000 Issue of debentures - 30,000 41,000 - Issue of shares - - - 55,000 Total 68,000 85,000 86,000 95,000 Less: Payments Purchases 48,000 80,000 81,000 90,000 Wages 5,000 5,000 5,000 5,000 Closing cash 53,000 85,000 86,000 95,000 15,000 - - - Problem 2
Month Sales Purchases Wages Exp. Jan. (actual) 80,000 45,000 20,000 5,000 Feb. (actual) 80,000 40,000 18,000 6,000 Mar. (actual) 75,000 42,000 22,000 6,000 Apr. Budget 90,000 50,000 24,000 6,000 May Budget 85,000 45,000 20,000 6,000 Jun. Budget 80,000 35,000 18,000 5,000 Solution
April ($) May ($) June ($) Cash & bank balance 15,000 11,700 12,700 Add: Cash sale (20%) 18,000 17,000 16,000 Cash collections from Drs. 66,000 70,000 66,000 99,000 98,700 94,700 Less: Cash outflow Cash flow (10%) 5,000 4,500 3,500 Payment of Crs. 37,800 45,000 40,500 Wages 23,000 22,000 19,000 Rent 500 500 500 Exp. 6,000 6,000 6,000 Fixed deposits 15,000 8,000 13,000 Cash balance (closing) 21,700 12,700 13,200 99,000 98,700 94,700 Problem 3
| Month | Sales ($) | Materials ($) | Wages ($) | Production ($) | Admin. Selling, etc ($) |
| Jun. | 3,000 | 1,800 | 650 | 225 | 160 |
| Jul. | 3,250 | 2,000 | 750 | 225 | 160 |
| Aug. | 3,500 | 2,400 | 750 | 250 | 175 |
| Sep. | 3,750 | 2,250 | 750 | 300 | 175 |
| Oct. | 4,000 | 2,300 | 800 | 300 | 200 |
| Nov. | 4,250 | 2,500 | 900 | 350 | 200 |
| Dec. | 4,500 | 2,600 | 1,000 | 350 | 225 |
The credit terms are as follows:
- Sales — 3 months to debtors. 10% of sales are in cash. On average, 50% of credit sales are paid on the due dates, while the other 50% are paid in the next month.
- Creditors for material — 2 months.
The lag in payment for wages is 1/4 month and 1/2 month for overheads.
The cash and bank balance on 1st October is expected to be $1,500.
Other information is given as follows:
- Plant and machinery are to be installed in August at a cost of $24,000. This sum will be paid in monthly installments of $500 each from 1st October.
- Preference share dividends @ 5% on $50,000 are to be paid on 1st December.
- Calls on 250 equity shares @ $2 per share are expected on 1st November.
- Dividends from investments amounting to $250 are expected on 31st December.
- Income tax (advance) is to be paid in December $500
Solution
| Cash Budget for Three Months Ending 31 Dec. 2024 | |||
| Details: | Oct. ($) | Nov. ($) | Dec. ($) |
| Balance b/d | 1,500.00 | 537.50 | 350.00 |
| Receipts (estimated): | |||
| Sales | 3,212.50 | 3,462.50 | 3,712.50 |
| Capital | - | 500.00 | - |
| Dividends | - | - | 250.00 |
| Total (A) | 4,712.50 | 4,500 | 4,312.50 |
| Payments: | |||
| Creditors | 2,400.00 | 2,250.00 | 2,300.00 |
| Wages | 787.50 | 875.00 | 975.00 |
| Overheads: | |||
| Production | 300.00 | 325.00 | 350.00 |
| Adm. S. & D. | 187.50 | 200.00 | 212.50 |
| Pref. Dividend | - | - | 2,500.00 |
| Income tax | - | - | 500.00 |
| Plant and Machinery (500 each) | 5,00.00 | 5,00.00 | 5,00.00 |
| Total (B) Year | 4,175.00 | 4,150.00 | 7,337.50 |
| Balance c/d (A - B) | 537.50 | 350 | (-3,025) |
Calculation of Amount of Sales
| Month | Sale ($) | Oct. ($) | Nov. ($) | December ($) |
| Jun. | 3,000 | 1,350.00 | - | - |
| Jul. | 3,250 | 1,462.50 | 1,462.50 | - |
| Aug. | 3,500 | - | 1,575.00 | 1,575.00 |
| Sep. | 3,750 | - | - | 1,687.50 |
| Oct. | 4,000 | 400.00 | - | - |
| Nov. | 4,250 | - | 4,250 | - |
| Dec. | 4,500 | - | - | 450.00 |
| Total | - | 3,212.50 | 3,462.50 | 3,712.50 |
Calculation of Wages
1/4 wages for September and 3/4 wages for October. Therefore, the calculation is:
(1/4 x 750) = 187.50
3/4 x 800 = 600
Total = 787.50
The wages for the other months can be calculated using the same approach.
Do you want to further test your knowledge about budgeting? We have prepared more quizzes for you.
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Cash Budgets: Practical Problems and Solutions FAQs
Cash flow problems are often caused by poor forecasting but can also be caused by slow payment from clients or suppliers, unforeseen expenditure incurred before the end of a reporting period, or even an increase in financing costs.
The cash budget is prepared following the operating budgets (selling expenses, sales, manufacturing expenses or merchandise purchases, and general and administrative expenses) and the capital expenditures budget has been accounted for.
The main purpose of a cash budget is to help manage incoming and outgoing cash flow to make informed decisions about how best to utilize its resources.
The cash budget consists of sources of cash and uses of cash. The sources of cash section comprises the beginning cash balance, cash receipts from cash sales, accounts receivable collections, and the sale of assets. The uses of cash section contains all planned cash expenditures from the direct materials budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget. This section may also comprise line items for fixed asset purchases and dividends to shareholders.
Incremental budgeting is a traditional budgeting method with which the budget is produced by taking the budget of the actual period or actual performance as a base, with incremental amounts then being added for the new budget period.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
