© 2000 John Petroff 

5)- Cash budgets:

A cash budget is an operational tool most appropriate to show patterns of monthly receipts, payments and repayment of outstanding credit over the period of a year. An example of a cash budget is presented in Table T-8.11 below. Cash on hand at the beginning of each month is incremented by collections from accounts receivable, and reduced by various disbursements for that salaries, utilities and purchases, giving cash on hand at the end of the month.

This end of month cash on hand is compared to an optimum cash balance planned by management, that is considered at an adequately safe level to avoid possible default, yet not excessive to avoid idle cash that earns no return. See determination of optimum cash balance in Section F of this chapter. If there is excess cash beyond the target minimum cash balance, it can be used to repay an outstanding credit line or other debt, or it can be placed in marketable securities. If the balance is short of the planned minimum, this tells management how much credit that must be obtained from its bank. Thus, the cash budget is used as a tool to determine month by month the amounts that need to be borrowed, and how the borrowed amounts will be repaid.

Tabel T-8.11 presents an example of cash budget.

 

Table T-8.11

Cash Budget
. January February March April May June July August Sept Oct Nov Dec
Total sales 1000 1200 1500 3000 5000 10000 14000 11000 9000 2000 2000 4000
Cash sales 100 120 150 300 500 1000 1400 1100 900 200 200 400
Collections 800 700 960 1170 1800 3300 6000 10200 11700 9300 6000 1800
Other income 300 300 300 300 300 500 2000 2000 300 300 300 2000
Total Receipts 1200 1120 1410 1770 2600 4800 9400 13300 12900 9800 6500 4200
Salaries 2000 2000 2000 2500 2500 3000 4000 4000 2500 2000 2000 2500
Utilities/other 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
Purchasing 4000 5000 6000 4000 2000 1000 1000 500 500 500 500 1000
Total Disbursements 7000 8000 9000 7500 5500 5000 6000 5500 4000 3500 3500 4500
Net Receipts- Disbursements -5800 -6880 -7590 -5730 -2900 -200 3400 7800 8900 6300 3000 -300
Cash BOM 3000 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 3300
Cash EOM 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 3300 3000
Optimum Balance 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500
Repayment or -Borrowing -5300 -6880 -7590 -5730 -2900 -200 3400 7800 8900 6300 2200 0
EOM Credit Outstanding 5300 12180 19770 25500 28400 28600 25200 17400 8500 2200 0 0
BOM = beginning of month, EOM = end of month

Obviously, such information must be submitted to a loan officer. The cash budget is indeed an essential tool of analysis when available. An analyst must look at it with scepticism because shown patterns of receipts and payments are not justified in the statement itself. Moreover, because the cash budget is a projection, the amounts must correlate with other parts of management's strategy. Finally and most importantly, scepticism is justified because these amounts can change rapidly as selling or collection difficulties develop. Thus, the amounts in the schedule must be checked to make sure they are realistic.

See review questions Q-8J5.1 through Q-8J5.4.

See research assignment R-8J5.1

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Last modified: Jun/01/01
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