Concept Of Cash Budget And Its Preparation

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A cash budget is a summary of the firm's expected cash inflows and outflows over a projected time. In other words, cash budget involves a projection of future cash receipts and cash disbursements over various time intervals. So, it is also called as cash receipts and cash disbursements budget. Cash budget helps the management in:

i. Determining the future cash needs of the firm.

ii. Planning for financing of those needs

iii. Exercising control over cash and liquidity of the firm.

The overall objective of cash budget is to enable the firm to meet all its commitments in time and at the same time prevent accumulations of unnecessary large balance with it.

Cash budget is mostly prepared on cash receipts and payments basis which is called Receipt and Payment Method. In this method, the cash receipts from various sources and cash payments to different agencies are estimated. Cash requirement of all functional budgets including capital expenditure budget are taken into account. Accruals and adjustments are excluded while preparing the cash budget by receipt and payment method. All the anticipated receipts are added to the opening balance of cash and expected cash payments are deducted from the total of this to arrive at the closing balance of cash for the period. The receipts and payments may be divided into two specific categories as follows:
Receipts:
A. Capital receipts
- Sales proceeds from capital assets
- Proceeds from issue of shares and debentures
- Loan from financial institutions

B. Revenue receipts
- Cash sales, collection from debtors and bills receivable
- Interest on loan and advances, investments
- Dividend receipts
- Others

Payments:
A. Capital payments
- Redemption of redeemable preference shares and debentures
- Payment of long term loan
- Purchase of fixed assets

B. Revenue payments
- Cash purchases, payments to creditors
- Payment of wages and salaries
- Payment of overheads
- Payment of selling and administrative expenses
- Payment of interest, bonus, dividend and donations
- Payment of short term bank loan
- Payment of Taxes

The preparation of cash budget is based mainly on following information:
- Detailed estimate of cash receipts
- Detailed estimate if cash disbursements
- Time lag in induced by credit purchases
- Desired ending cash balance

If the ending cash balance is in excess of desired ending cash balance , the loan may be repaid to temporary investment may be made. And if ending cash balance is less than desired one, then borrowing will be made.

Specimen Of Cash Budget

Beginning cash balance
+ Cash receipts from sales and collection
+ Borrowing - issue of debentures
+ Issue of shares
+ Sale of investment and fixed assets
+ Receive of interest and dividend
= a) Cash available for disbursements
- Cash purchases
- Payment to creditors
- Payment of wages and salaries
- Payment of overheads
- Payment of selling and administrative expenses
- Repayment of loan
- Redemption of debentures
- Purchases of fixed assets
= b) Total cash needed for payments
- Cash excess or deficiency (a-b)
- Minimum desired balance
= Cash(needed) or available for investment or repayment of loan.
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