Importance of Cash Budgets

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Table of Contents

Introduction
Cash budget
Analysis
Conclusion
References

Introduction

Cash budgets are useful in allocation of cash to respective areas of need and further identifying of the cash available for use in the preceding month/year (Mills, 2005). It takes into consideration the actual cash available during the month for use. Cash not available during the month being evaluated is considered as not being available for use during that month and hence not include for that particular month (Ogutu, 2008).

Cash budget

The table below shows the cash income and expenditure incurred during the Month of December.

	December
Cash on Hand(beginning of month)	6,000

CASH RECEIPTS
Sales Revenue	73,150
Collections fm CR accounts	3,600
Operating Income	2,500
TOTAL CASH RECEIPTS	79,250
Total Cash Available(before cash out)	85,250

CASH PAID OUT
Credit Purchase payment	21,000
Cost of sales	7,250
Wage expense	24,000
Miscellaneous
SUBTOTAL	52,250
TOTAL CASH PAID OUT	52,250
Cash Position (end of month)	33,000

Analysis

The cash budget takes into consideration only the cash received and payable within the month the month of December. Prepaid rent was already paid and hence despite being an expense for the month of December, no cash is used in December to settle the same.

Cash at hand at the beginning of the month is presumed to be the cash at the end of the previous month which is 6,000.

Cash receipts: The cash sales value during the month of December is given by 95% of 77,000 which is the total sales during the month. The total sales revenue for the month is therefore given as 73,150.
Total cash available: this is the value of all the cash received within the month of December and hence available for offsetting any bills to be incurred during the month. This includes receipt from sales, receipt from credit sales during the previous month and income generated from operating expenses.
Cash paid out: this section takes into consideration the cash paid out during the month of December. These include payment of amount owed for purchases made during the previous month 75% of 28,000 which is 21,000, cost incurred for inventory purchases during the month of December 25% of 29,000 which is 7,250. and the wage expenses. Despite being attributable to the month of December, prepaid rent is not included in expenses as it has not impact on the cash available and hence is reserved for balance sheet entry (Jacob, 2010). Depreciation expense is also not included in the cash budget has it has no effect on the cash available for use to the business owner and like prepaid rent is reserved for balance sheet (Benjamin, 2011). The wage expense is incurred during the month and likewise is fully settled during the month. This justifies its inclusion amongst the cash aid out items.

Conclusion

In conclusion, it is important to note that the cash budget gives the value of cash that will be available for use by the business at the start of the coming month. The value in this case is $33,000. The total cash available for use by the business is given as $85,250 and the total cash paid out is given as $52,250. Exclusions from the cash budget include depreciation expense and pre-paid expenses. The value of cash available for use during the coming month is $33,000.

References

Benjamin, C. (2011). Understanding working capital. Web.

Jacob, L. (2010). Statement of Cash Flows and Working Capital Analysis. Journal of Financial Analysis, 7(3), pp. 234-236.

Mills, J. (2005).Working Capital and Cash Flow Analysis. London: McGraw Hill.

Ogutu, F. (2008). The Importance of Working Capital Management. Nairobi: Longhorn Publishers.

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Importance of Cash Budgets

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