Cash Budget | Explained With Full Example | Cost Accounting

Summary

This 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.