Cash Budget | Explained With Full Example | Cost Accounting
Summary
TLDRThis educational video script offers a comprehensive guide to creating a cash budget, focusing on the importance of estimating cash flows for operational efficiency. It walks through an example of Scene Limited, detailing the process of calculating cash inflows from sales and credit collections, as well as outflows from purchases, expenses, and other payments. The script emphasizes the simplicity of the task and provides a step-by-step approach to ensure a clear understanding of cash budgeting.
Takeaways
- 😀 A cash budget is an estimation of cash flows over a specific period and is crucial for ensuring a business has sufficient funds to operate.
- 💼 It's important to remember that a cash budget only deals with actual cash movements, not accounting profits or debts.
- 📅 Companies create cash budgets for specific time frames, such as months or years, to plan and manage their cash flow effectively.
- 📊 The script provides an example of Scene Limited, illustrating how to prepare a cash budget for the months of April, May, and June.
- 🔢 The opening balance is a starting point for the cash budget and is given for the first month; subsequent months' balances are calculated based on the previous month's closing balance.
- 💹 The cash budget includes both cash sales and credit sales, with specific percentages allocated to immediate cash inflow and future debtor collections.
- 📈 Forecast sales are essential for the cash budget, and the script explains how to calculate cash sales and credit collections based on these forecasts.
- 🗓️ A debtors collection schedule helps in understanding when credit sales will be collected, typically spread over several months post-sale.
- 🛒 Credit purchases are also accounted for in the cash budget, with payments often spread between the month of purchase and the following month.
- 🏢 Other cash inflows, such as rent and salaries, are considered expenses and are subtracted from the total cash available to determine the closing balance.
- 📋 The final step in creating a cash budget is calculating the closing balance, which reflects the business's cash position at the end of the budget period.
Q & A
What is the main purpose of a cash budget?
-A cash budget is used to estimate cash flows over a specific period of time, helping companies ensure they have enough funds within the business to operate.
Why is it important to remember that a cash budget deals with actual movement of cash?
-It is important because the cash budget only accounts for transactions that involve the actual movement of cash, excluding any non-cash transactions.
What is the first step in preparing a cash budget for Scene Limited?
-The first step is to determine the opening balance of cash, which in the case of Scene Limited is given as twenty thousand Rand on the first of each month.
How does Scene Limited's sales forecast for April, May, and June impact the cash budget?
-The sales forecast for these months helps determine the expected cash inflows from both cash sales and credit sales that will be collected during these periods.
What percentage of Scene Limited's sales are made in cash, and how does this affect the cash budget?
-40% of Scene Limited's sales are made in cash, which directly contributes to the cash inflow for the month of sale in the cash budget.
How is the credit sales collection schedule used in the cash budget?
-The credit sales collection schedule is used to determine when the remaining 60% of sales made on credit will be collected, which is spread out over the month of sale and the following two months.
What is the significance of the debtors collection schedule in the cash budget?
-The debtors collection schedule helps in estimating the cash inflows from credit sales over the specified period, ensuring accurate cash flow forecasting.
How are other cash incomes incorporated into the cash budget?
-Other cash incomes, such as any additional cash inflows from non-operational activities, are included in the cash budget to provide a comprehensive view of the total cash inflow.
Can you explain the process of calculating the cash available and the closing balance in the cash budget?
-The cash available is calculated by adding all the cash inflows, including opening balance, cash sales, and collections from credit sales. The closing balance is then found by subtracting all cash outflows, such as purchases, expenses, and other payments, from the cash available.
What is the treatment of credit purchases in the cash budget?
-Credit purchases are treated as cash outflows in the cash budget. Typically, 50% of credit purchases are paid in the month of purchase, and the remaining 50% is paid in the following month.
How does the cash budget account for expenses such as rent, salaries, and interest payments?
-Expenses like rent, salaries, and interest payments are treated as cash outflows in the cash budget and are deducted from the cash available to find the closing balance.
Outlines
📊 Introduction to Cash Budgeting
This paragraph introduces the concept of cash budgeting, emphasizing its importance for estimating cash flows over a specific period. It clarifies that cash budgets focus on actual cash movements, excluding non-cash transactions. The purpose of a cash budget for companies is to ensure operational liquidity. The example of Scene Limited is introduced, with sales figures for January, February, and March, and the task of preparing a cash budget for April, May, and June is outlined. The process begins with identifying the opening cash balance and forecasting cash sales based on a percentage of total sales.
🗓️ Debtor Collection Schedule
The second paragraph delves into the debtor collection schedule, illustrating how to track and account for credit sales that are collected over time. It explains the distribution of credit collections over the months following a sale, with percentages allocated to the month of sale and subsequent months. The example continues with Scene Limited, showing calculations for credit sales collections in April, May, and June, based on previous months' sales. This process is crucial for understanding cash inflows from credit customers.
🛒 Credit Purchases and Other Expenses
This paragraph discusses credit purchases and their payment schedule, highlighting that 50% of credit purchases are paid in the month of purchase and the remaining 50% in the following month. It also covers additional expenses such as rent, salaries, interest payments, and equipment purchases, all of which are cash outflows. The example provided calculates these expenses for April, May, and June, showing how they affect the cash budget.
💼 Completing the Cash Budget
The fourth paragraph demonstrates the final steps in completing the cash budget. It shows how to calculate the closing balance for each month by subtracting all cash outflows from the cash available. The process involves totaling cash inflows, including sales and other income, and then accounting for expenses such as credit purchases, rent, salaries, and other payments. The paragraph emphasizes the importance of accuracy in reflecting cash movements within the business.
🎓 Conclusion and Engagement
In the concluding paragraph, the script summarizes the lesson on cash budgeting, reinforcing the simplicity of the process when focusing on cash flows. It invites viewers to share their learning experiences, ask questions, and engage with the content. The speaker encourages viewers to subscribe to the channel, like the video, and share it, and signs off with a friendly farewell until the next lesson.
Mindmap
Keywords
💡Cash Budget
💡Cash Flows
💡Opening Balance
💡Sales
💡Credit Sales
💡Debtors Collection Schedule
💡Credit Purchases
💡Rent
💡Salaries and Wages
💡Interest Payment
💡Equipment Purchase
💡Closing Balance
Highlights
Introduction to the concept of a cash budget, emphasizing its importance for estimating cash flows over a specific period.
Explanation of why companies create cash budgets, to ensure sufficient operational funds.
Description of the process for preparing a cash budget, focusing on the months of April, May, and June.
Clarification on the importance of opening balances in a cash budget and how they relate to the previous month's closing balance.
Detailing the method to calculate cash sales from forecasted sales, highlighting the percentage received in the month of sale.
Introduction to the debtors collection schedule for credit sales, explaining how to track cash inflows from credit customers.
Demonstration of how to create a debtors collection schedule for the months of April, May, and June.
Explanation of how to account for credit purchases and their payment schedule in the cash budget.
Guidance on calculating cash outflows for rent, salaries, wages, and interest payments within the cash budget.
Inclusion of one-time cash outflows such as equipment purchases and trading fines in the cash budget.
Step-by-step instruction on how to total up cash inflows and outflows to find the closing balance for each month.
Emphasis on the simplicity of the cash budget process once the initial setup is understood.
Reinforcement of the focus on cash movements only, distinguishing cash budgets from other financial analyses.
Encouragement for viewers to apply the knowledge gained to create their own cash budgets with confidence.
Invitation for viewers to share their educational level and feedback in the comments section.
Call to action for viewers to like, share, and subscribe to the channel for more informative content.
Transcripts
welcome to contacts in this lesson we're
going to be looking at the cash budget
we're going to go through an example and
I'm confident that after this lesson it
should be able to do a cash budget on
your own why do we do the cash budget or
what is a cash budget this is when we
estimate cash flows over a specific
period of time and it is very important
to remember that we are estimating cash
flows and so we are dealing with actual
movement of cash so if anything that is
not cash will not be dealt with in the
cash budget and it's over a specific
period of time so whenever you ask to do
a cash budget you'll be told for which
months or for which years to do the cash
budget for and why do companies do the
cash budget
well companies do this in order to
ensure that they have enough funds
within the business to operate so when
you do the cash budget you are looking
at what is the cash flows during that
specific period over which you are doing
the cash budget so let's go to the
example in this example we are told that
scene Limited had sales of 100,000 ran
in January 800,000 and in February and
90,000 rain in March and we also given
the other information and at the bottom
here we asked to prepare the cash budget
for scene limited for the months of
April May and June so there we have our
periods we asked to do it for every May
and June and that is the only months we
are going to focus on so how do you do
the cash budget this is the table that
we are going to use we have a table it's
written cash budget we have the details
on the left and we have raw three months
on the right April May and June what is
the first thing that we do want to look
at the cash budget we will have our
opening balance so what is our opening
balance so let's add opening balance day
and let's look down here we are told in
additional information that the company
had a cash balance of twenty thousand
ran on the first of every so we'll put
that under opening balance on April
twenty thousand right now for May and
June we don't have the opening balances
the reason for that is because we have
to complete the cash flows for eppley
and their closing balance for every
rupee the opening balance for me and
likewise the closing balance for me will
be the opening balance for June and that
is why we don't have for May and June so
always remember that you will usually be
given the opening balance for the first
month so let's move on to the next thing
what do we have what we our sales were
told here that feel limited had sales of
hundred thousand ran in January
eighty thousand ran in February and
ninety thousand ran in March so those
are some of the sales and we are told
what they they the forecast sales are
for the months of April May and June
it's very important to always remember
that you're dealing with cash here and
not anything on credit so we have to
deal with the cash movements here so we
look at the details like this forty
percent of the company's sales are in
cash so what is the first thing that
we're going to do we're going to do
sales cash sales right this is the sale
that we will have in April May and June
and will receive the money in that same
month and then we'll also have sales
credit sales where we'll receive the
money in April May and June but you look
at that a bit later on but let's look at
the sketch sales
we're told that 40% of the company's
sales are in cash then we're told the
company's forecasts sales for the coming
months as follows a print hundred ten
thousand one may hundred thousand Rand
and June hundred and twenty thousand
right so we know that forty of forty
percent of that will be paid in the
month of sale so we're going to take
hundred and ten thousand grand for the
month of April times the forty percent
to get the cash sale for that month it
gives us forty four thousand gram so put
that for the four thousand redundant
apron and we'll do the same for me and
June so May they their sales
forecast is a hundred thousand Rand
multiply that by 40 percent and it gives
us 40 thousand Rand so we put that under
me and we do the same for June one
hundred and twenty thousand ten times
forty percent will give us what the cash
sale was forty-eight thousand Rand and
who could
that June now you can see how a simple
exercise this is whenever you're given
the sales forecast or the sales for the
months you have to do the cashback that
for only look in the information and see
how many percent of those we're in cash
and you'll take that and put that under
sales and then cash and then we move on
to the next one remember if 40% was on
cash we know that 60% was on credit now
we ask ourselves the question when will
that be paid whatever would be paid in
the month in question or in the months
at which you are doing the cash budget
April May and June we have to include
that because that will be our cash
inflow so if you can see down here we're
told that the trade debtors or credit
things are collected as follows so now
this is the 60% how is it collected
we're told that 20% during the month of
sales 50% during the first month
following the same 20% during the second
month following the month of sale and
10% during the third month following the
month of sale now I hope you can see
from this that we have to do what is
called the debtors collection schedule
or the credit collections and if you'd
like to check that one out we have a
video specifically for that to help you
understand how to do the credit
collections is a very simple one as well
so if you'd like to check that one out
you can find a link in the description
below or you can click the link on the
top right of the screen right now but
here's the table that we will use to do
that debtors collection schedule for you
to know how easy it is to do that so
I've already drawn the data collection
schedule have already plugged in the
month day just for the sake of time and
you can ask yourself the question why do
I put January February March April May
June when because we might collect some
money from January in April when you
might collect the money from February in
April or May and we'll see that just now
we are told that during a 20% is
collected during the month of sale so if
the sale happened back then in January
20 % was collected and then 50% was
collected during the first month
following the sale so it means that 50%
of January sale was collected in
February and 20% during the second month
following the month of sale it means 20%
of January sale was collected in March
and then 10% during the
so that means that 10% of January Sain
will be collected during the third month
which is every and that's why we have
January here we want everything that
effects April May and June because we
are doing the cash budget based on these
three months so we'll just run through
this if you'd like to see a similar
example like I said you can click on the
link in the description below so for
January how much was the same the sales
for January was hundred thousand Ren and
ten percent would be collected in the
third month following the month of sale
we are not concerned with this three
because twenty percent was collected in
January fifty percent in February twenty
percent in March we only concerned what
what happens in these three months and
we know that ten percent during the
third month following the month of sale
so we're going to take a hundred
thousand gram which is the same for
January and we're not going to multiply
that by ten percent yet because we know
forty percent of it was cash so one the
sixty percent
we just don't read it so we take hundred
thousand rand times the sixty percent we
just on credit time is the 10% we just
collected in the third month following
the month of saying which is every and
gives us an amount of 6000 yen so put
six thousand Rand a and then we do the
same thing for February we are told that
eighty percent is in February that was
the sale in February and we know that 40
percent wasn't was in cash so we know
sixty percent is on credit so one that
sixty percent so we say eighty percent
eighty thousand Rand times sixty percent
time is a twenty percent who just
collected during the second month
following the month of sale so that is
how very same the second month following
the month of sale is April so that 9600
goes to three and then we move on to
much 90,000 ran was the sale in March
and we know forty percent was in cash so
60% was on credit so that's what we want
so 60% of much much sale is on credit
how much of it will be collected in in
April when we are told here that fifty
percent is collected during the first
month following the month of sale so 50
percent of what was on credits from much
sales will be collector in heparin so we
take ninety thousand Rand total sale
times sixty percent that's the total
charge on credit Simon's fifty percent
which is blue sheet
like that in April which is 27,000 run
so between the 7000 ran down day and
then we move on to every now we are in
the month in question that's why we have
April also here so we know that in have
real hundred and ten thousand rain is
forecasted as the sales and we know that
for the person is on cash so we've dealt
with that one already
and then the 50 percent which is on
credit you know that 20 percent of the
tool to collected in April so we have
hundred and ten thousand current sales
times sixty percent the total credit
sales times twenty percent which would
be correct in the month of sale which is
April we get 13,200 so good 13200 so we
are done with April
we have ever done everything that we
needed to do in April now the rest will
do now for May and June so for me with
anything from January collected in May
when we can see twenty percent would be
collection the month of saying that is
January fifty percent well attend the
first month following the month of sale
of February twenty percent during the
second month following the month of sale
there is much and ten percent during the
third month following the month of
saying that's every so we can see that
January's credit sales do not affect me
though or have been all collected by
April so we have nothing day in January
now February you know the ten percent
would be June the third month following
the month of sale and there is February
March April and May so much April and
May
so another 10% of February credit sales
would be collected in May and who do the
exact same thing we did before January
we take February's total sales eighty
thousand run times sixty percent the
total credit sales time is what I'm able
to collected in May which is 10% and get
4800 right so put 4800 ran in February
and then how much of much much credit
sales are collected in me well we know
it's 20% concerts during the second
month following the month of sale so how
much were the sales in March
sales in March were 90,000 grand so we
take 90,000 grand times 60 percent the
total credit sales time is 20 percent
which should be collected in May get
10,000 it
under Glenn I hope it's making sense as
we go along so I'm just gonna speed it
up right now and then how much from
April collected in May when you can see
here has two percent during the first
month following the month of sale so we
take April total sales hundred and ten
thousand ran time sixty percent times
fifty percent will be collected in May
instead of thirty thousand runs so put
thirty three thousand ran and then May's
credit sales how much of it will be
collected in May when it's 20 percent
cause during the month of sale so we
take the total sales from a hundred
thousand run time is sixty percent times
twenty percent able collected in the
month of sale
gives us a total of twelve thousand
right and there we have just completed
me so let's go to June so now we know
that nothing in February collected in
June costly to be all collected by the
month of May so we know that ten percent
would of match his credit failing to
collected in June so we take much sales
total sales 90,000 run time is 60
percent together total credit sales
times ten percent who should be
collected in June at 5400 and then for
April how much of April's credit sales
of collected in June we know that it's
the twenty percent so we take hundred
and ten thousand read total sales for
April times sixty percent times twenty
percent she programs in June we have
thirteen thousand two hundred grand who
put that down and then May's credit
sales how much of it in prorated in June
it's fifty percent so we take one
hundred thousand Rand which is May's
total sales times sixty percent that is
the total credit sales times fifty
percent which a product collected in
June we put that thirty thousand reign
over they how much of June's credit
sales would be collected in June
well we know that it's twenty percent so
we take total sales in June hundred and
twenty thousand run time is sixty
percent which is the total credit sales
time soon the person who she was elected
in the month of sale which is June 14
thousand four hundred so we have just
done June so we are done with the data
collection schedule or the credit
collections for the month of April May
and June now what we have to do is total
them up so we know that these are the
cash inflows from credit sales that will
be collected in the
three months so what we have to do you
have to put it in our cash budget so
we're gonna take our cash our they cash
inflows from data collection schedule
and put it in our cash budget so we're
gonna put sales credit so that we know
that this is from the credit collections
and then we put these totals here
fifty-five thousand eight hundred six
thousand six hundred and sixty thirty
thousands in their month so we'll put
that down and then we move on to the
next one here we are told that the
company anticipate other cash income as
follows so here we go to other cash
income we have for April May and June so
we have to include that in our cash
budget because there is cash moving in
or coming into the business that is a
cash inflow so let's put that down
AdvoCare the description doesn't really
matter via routine have a cash income or
other cash that doesn't matter as long
as you are doing your cash budget
correctly and then you put the three so
put them all day so we are done with
that one and then we are told that the
credit purchases from March amounts to
sixty thousand and so you can see from
here going down these are just purchases
and expenses so what I like to do when
I'm doing the cash budget is to just
have my total income or the total cash
inflow down here so it's easy when I
calculate the final figures even if you
don't do it I don't you'll be penalized
for that so I put cash available and
what that means is that I'm adding up
all the inflows or the cash that we have
received to deal in the month and put in
the total down here so I'll put down the
one for April so I had them up together
it comes to 129 800 now for May and June
I'm not gonna do them as yet because I
don't have the opening balances remember
like I said the opening balance for me
would be found from the closing balance
of April and the closing balance for May
will be found I will be will be the
opening balance for June so we'll wait
until we get the closing balance for
April then be able to get the rest so
now that Jeff we have totaled that up
let's look at the credit purchases we're
told that the credit patches for March
amounted to 60,000 RAM and
focus for the next three months as
follows and we are given the focus
create purchases for April May and June
and what is important is here fifty
percent of credit purchases are paid in
the month of patches and the balance is
paid in the following month so you
paying fifty percent in the month that
you have put in that you have done the
credit purchases and you're paying the
remainder fifty percent in the following
month so that should be easy so let's
draw a table similar to the debtors
collection schedule called the credit
purchases which will make it very simple
so we'll just run through it quickly
now how much of matches credit progestin
per collected in April but we know that
in match fifty percent was collected
while I was paid of the a credit
purchases was paid and then in April
fifty percent would be paid so who take
the credit badges for match g6 2000 ram
we multiply that by 50 percent and we
get thirty thousand run so there is how
much will be collected in April for
March and then in every and how much
alcohol except for for it in April
amateur collector for April for the
month of April when we are told that
fifty percent is collected in the month
of patches and who purchased fifty
thousand ran worth of purchases in April
so we'll collect 50 percent of that in
April so we'll take fifty thousand times
fifty percent would get twenty five
thousand Rand so put down twenty five
thousand Rand we just finished with
April so this one is a simple one
so an in May we know that we have
finished collecting the one from match
cause you collected 50 percent in March
and fifty percent in April and for a
period we've collected fifty percent in
April and they remained a 50 percent
collected in the following month which
is March so what is the amount for April
it's 50,000 run so fifty thousand grams
times fifty percent we get twenty five
thousand Rand and that's how much should
be collected in me and how much of male
speaker will be collected in May we know
that it's fifty percent so we take the
maze maze amount forty thousand Rand you
multiply that by 50 percent it gives us
twenty thousand Rand and you put down
twenty thousand rain and we've just
completed the collections or the
payments for April the credit payment
for April remember always remember these
are credit purchases that we made as a
company so we are paying out so this is
an expense going over
business and then in June while you're
not collecting anything from Matt's
cause if collected it all in April we're
not collecting anything from April
because we've collected all by May and
then how much of May salmon will be
collected in June it's 50% so we'll take
May's amount which is called a thousand
time times 50% and we are paying twenty
thousand wren of May's amount in June so
put twenty thousand REM day and then
June how much of June's amount collected
in June it's 50 percent again
so we'll take forty thousand rent for
June the purchases that we made times
fifty percent and we paid out twenty
thousand times for June and have just
completed the credit purchases that's
how easy this one is so we just toss all
those up so just sort of them up and
then we'll go back to our cache budgets
who put their purchases and then under
purchases who put down the totals that
we have here but remember who putting
them in brackets because it's a cash
outflow it's money that is leaving our
business so put the amounts they in
brackets then we move on the rest should
be very simple we are told that rent
paid amounts to five thousand rent per
month so this is rent for each of the
three months that we are doing the cash
budget for so we'll put the rent and put
five thousand rent for each of the three
months and who put them in brackets
because it's a cash outflow and then
we're told that salaries and wages
amounted to 20,000 rent per month we do
the exact same thing we did for rent so
good salaries and wages and who put
twenty thousand rain in brackets for the
three months then we also told that an
interest payment of five thousand rent
is due in May so this is just
specifically for me so nothing in April
and nothing for June so put interest
expense nothing for April nothing for
June but inmates five thousand ran like
we are told and then we're told
equipment valued at 7,500 remember
purchased in cash in April so they have
put equipment purchases or equipment
patches and it's only in April so put
down seven thousand five hundred around
nothing in May and nothing in June
because we are not told of connecting
with regards to equipment for those two
months and then a trading fine of ten
thousand rayna's payable in June so it's
not in April it's know
may its in June so put trading fine and
we'll put it on by June 10,000 written
in brackets so you can see you put all
our expenses in brackets all the cash
outflows in bracket and then we have
just completed the cash budget because
that is the last one that we have just
done so what you do you put our closing
balance at the bottom so put closing
balance and what we will take since we
have already totaled up the cash
available I'm going to take the cash
available and deduct all of these
expenses or all these cash outflows will
deduct them to get our closing balance
what you could have done as well you
could have totaled up your your your
cash outflows all these ones in brackets
and put it down here well I didn't do it
but you could have done it for the sake
of simplicity but it does not matter as
long as you do your cash budget
correctly and your closing balance is
correct so I just took my cash available
and - all these expenses or cash
outflows and we get the closing balance
of thirty two thousand three hundred
rent now we go to me and put our opening
balance remember like I said I open in
balance for me is the closing balance
for April so good for the two thousand
three hundred and then we and I can now
have our cash available we add them up
together we get the cash available of
150 four thousand nine hundred grand and
now that we have our cash available we
can deduct all our expenses so all our
cash outflows to get our closing balance
for me and seventy nine thousand nine
hundred gram and we take a closing
balance for me and put it as an opening
balance for June so could the seventy
nine thousand nine hundred rende and
then we get our cash available at them
we add up all our cash inflows we get
two hundred and one thousand nine
hundred rent and we deduct all our cash
outflows we get hundred and twenty-six
thousand nine hundred Rand and we have
just completed our cash budget so you
can see how simple doing the cash budget
is always remember cash budget deals
with cash flows only the movement of
cash and we are dealing with these three
months specifically so you're paying
attention to what is happening in this
day months I hope that has helped I hope
it has made sense if you have any
questions or any queries you can leave
them in the comment section below
otherwise if you have learned something
from this lesson if you have gained
value from this lesson
please leave a comment down below and
let us know also let us know what level
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sharing our video if you can until next
time Cheers
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