Cash Planning

A cash budget is used internally by management to estimate cash inflows (receipts) and outflows (disbursements) of cash during a period and the cash balance at the end of a period. In other words, a cash budget is a plan for an organization to obtain and use resources over a specific period of time. This means an organization must have an idea of where their money is coming from and how it should be spent.

Note: A cash budget includes cash only. Do not include discounts received or allowed, credit purchases or sales, bad debts, depreciation, or any other non-cash items!

Use of Cash Budgets

Cash budgeting allows an organization to set a goal and move toward that goal. This is important because each organization has a finite amount of resources and these resources need to be used effectively. Management uses cash budgeting to manage the cash flows of an organization. For example, employees must be paid every two weeks. The cash budget allows management to forecast whether or not they will have enough cash to pay their employees. If there are shortfalls of cash, the budget may be adjusted to correct problems before payments are due.

Similarly, the cash budget allows management to predict having large amounts of free cash on-hand. Having plenty of cash is great – however, a surplus of cash is often better used to expand and develop areas of an organization. Whether it is a shortfall or surplus, a cash budget is used to allocate cash in the most effective way possible across an organization.

Coping with Uncertainty

Since a cash budget is based on estimates, it is limited to represent expected values. Uncertainty in cash budgets is due to the uncertainty of ending cash values. To deal with uncertainty, there are two main techniques an organization can use:

  1. Sensitivity analysis. This involves examining how different values of an independent variable impact other dependent variables. This technique gives management insight of the expected cash flows if changes to certain variables occur.
  2. Short-term financing. A company should be certain that it has access to lending at reasonable costs to cover cash shortages.

Preparing a Cash Budget

There are three key pieces to consider when creating a cash budget:

  1. Time period (what time period does this budget cover? 3 months? 6 months?)
  2. Cash position (how much cash would you like to have readily available?)
  3. Sales and expenses (what are your projected sales and expenses?)

It is important to know that a cash budget is created as part of a master budget. The cash budget adds cash receipts and subtracts cash payments. Ideally, the cash budget should have a positive cash projection – this means the company is expecting to have enough cash to make it through the period.

Format of Cash Budget

Beginning cash balance

Add: Cash receipts

Less: Cash disbursements

= Excess/shortage of cash

+/- Financing

= Ending cash balance

Budget: Estimate Cash Receipts

Due to accrual basis accounting, sales revenue is not the same as a cash inflow. Sales revenue is recorded when it is earned. Since some customers make purchases on account (on “credit”), cash is often received at a later accounting period. To remedy this, companies estimate the amount of revenue that will be paid (in cash) in the month of sale.

Johnson Company’s sales are 35% cash and 65% credit. Based on previous records, Johnson Company expects to collect credit sales as follows:

Month of sale

1st month after sale 2nd month after sale



25% 20%


Johnson Company had sales in January, February, and March 2018 were:

March (projected): $60,000

February: $55,000

January: $50,000

Prepare the cash receipts budget for March.

Step 1: Calculate cash expected from March sales

Expected cash percent of  sales x Total Sales Expected March = Expected Cash

35% x $60,000 = $21,000

Step 2: Calculate cash expected from March credit sales

Expected Credit percent of sales x Total Sales Expected March x Expected Percent that those credits will be collected in March = Expected Cash from Settled Credit (Mar)

65% x $60,000 x 45% = $17,550

Step 3: Calculate cash expected from February credit sales

Credit Percentage of Sales x Total Sales from February x Expected Percent of that credit that will be collected in March = Expected Cash from Settled Credit (Feb)

65% x $55,000 x 25% = $8,938

Step 4: Calculate cash expected from January credit sales

Credit Percentage of Sales x Total Sales from January x Expected Percent of that credit that will be collected in March = Expected Cash from Settled Credit (Jan)

65% x $50,000 x 20% = $6,500

Johnson Company
Cash Receipts Budget
Month Ending March 31, 2018
Budgeted collections from March sales:
Cash sales ( 35% x $60,000)  $         21,000
Credit sales (65% x $60,000 x 45%)  $         17,550
Budgeted collections from February sales:
Credit sales (65% x $55,000 x 25%)  $           8,938
Budgeted collections from January sales:
Credit sales (65% x $50,000 x 20%)  $           6,500
Budgeted cash collections during March  $        53,988

Budget: Estimate Cash Disbursements

Due to accrual basis accounting, expenses incurred are not the same as cash outflows. Companies often make purchases on account and these expenditures will not be paid until a later period. As with the previous example, companies will estimate the portion of expenditures that will be paid that month and in following months.

Johnson Company purchases inventory on account, pays for 40% in the same month purchased and 60% the following month. Johnson Company’s purchases are:

February Purchases

March Purchases


Johnson Company had the following additional costs in February:

  • Depreciation expense: $4,200
  • Cash dividends declared: $5,300
  • Loan repayments: $2,200/mo.
  • Monthly operating costs: $10,000

Johnson Company pays 70% of cash operating costs in the month incurred and the remaining 30% the following month. Prepare a cash disbursements budget for March 2018.

Step 1: Calculate Cash to be paid for March purchases

Percent of March inventory cost paid this month x Inventory purchased this month = Cash paid for March Purchases

40% x $30,000 = $12,000

Step 2: Calculate Cash to be paid for February purchases:

Percent of February inventory cost paid this month x Inventory purchased in February = Cash paid for February Purchases

60% x $40,000 = $24,000

Step 3: Calculate Cash to be paid for March operating costs

Percent of operating costs paid in current month x March operating cost = Cash paid in March for March Operations

70% x $10,000 = $7,000

Step 4: Calculate Cash to be paid for February operating costs:

Percent of Operating Costs Paid Month After Incurred x February operating cost =  Cash paid in March for February Operations

30% x $10,000 = $3,000

Johnson Company
Cash Disbursements Budget
Month Ending March 31, 2018
Budgeted cash to be paid for:
March purchases (40% x $30,000)  $      12,000
February purchases (60% x $40,000)  $      24,000
March operating costs  $         7,000
February operating costs  $         3,000
Loan repayment  $         2,200
Cash dividends  $         5,300
Budgeted cash disbursements during March  $      53,500

Remember, depreciation expense is not included in the cash disbursements budget because depreciation is a non-cash item.

Summary of Cash Budget

The February 28 cash balance is $4,500 for Johnson Company. Johnson Company must maintain a minimum cash balance of $10,000. If under $10,000, Johnson must make up for this cash shortage by borrowing money from a bank (in the form of a loan).

Johnson Company
Summary Cash Budget
Month Ending March 31, 2018
Cash balance, February 1, 2018  $    4,500
Add: budgeted cash receipts  $  53,988
Less: budgeted cash disbursements  $(53,500)
Budgeted cash balance  $    4,988
Operating cash borrowings on February 28, 2018  $    5,012
Cash balance, February 28, 2018  $  10,000

Johnson Company expects to end the month of February with a $4,988 cash balance. Therefore, Johnson must plan ahead and borrow the necessary amount of cash to reach $10,000. In this instance, Johnson must borrow at least $5,012 or more. This loan repayment will be reflected in the cash budget in subsequent accounting periods.

Evaluating a Cash Budget

To evaluate a cash budget, the actual figures for the period must be compared to the budgeted figures. Comparing the budgeted vs. actual figures will provide insights to make important decisions about the cash position of a company. As more data is gathered (past sales, past purchases, etc.) more accurate budgets can be created.

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