Question

I have a concept question that I am not sure how to answer:

ABC Company is in the process of preparing a budget for the upcoming year. The marketing department has just increased the number of units in the sales budget by a significant 50% as compared to the last sales budget that was prepared for the year. Explain the impact this change will have on the Cash Budget.

Be specific about…

how the components of the Cash Budget will be affected.

what the manager of the Cash Budget must do differently to implement the revised budget.

Answer 1

Cash Budget is made to estimate whether the cash flows from company's operations will be sufficient to meet the projected cash requirements. It has majorly two main components, cash receipts and cash expenditures. If the the number of sales units are increased by 50%, then both the components will be affected.

Cash Recipts:-

For the incresed units of sale, the sales estimated to be made in cash will be added in the receipts section. The sales component to be made in credit, will be accounted as receipts from debtors when they are estimated to be received. But the other incomes which are not directly related to sales, for example dividend will remain same.

For Example sales increased for 500 units amounting to $ 100000. It is estimated that 20% sales would be made in cash and rest 80% will be recovered in next month from the debtors. So $ 20000 will be shown as receipts from sale in the current months budget and rest $ 80000 will be shown in next months budget as receipts from debtors.

Cash Expenditures:-

For the incresed units of sale, expenses will be increased for manufacturing the additional units. Raw material will have to be purchased, operating expenses (variable expenses) etc will increase proportionately. Other expenses not directly required to be made for producing the extra units will remain same.

For example raw material purchased for $ 80000, cash paid to creditors for $40000 and rest $ 40000 will be paid after one month. so $ 40000 will be payment made to creditors in current month and $ 40000 in the next to next month (when they are to be actually paid).

The managers keep analysing the budgets continuously and any possible changes in the business environment and their impact on the budget. So in case of change in the sales budget, the manager of the cash budget will implement the changes in his budget as soon as he gets to know about his change and further inform the other managers of all the other budgets that will have a impact on them due to this change in the sales budget.