Question

How do you prepare the cash budget and describe the relationships among its components?

Answer 1

Cash budget is useful for deriving amount required for each month, which is how much company owns and owes in the form of cash at the end of the month

Cash budget can be prepared by using the following formula

Opening balance of cash + cash receipts – cash disbursements = Excess/ deficit in cash

Excess / deficit in cash can be adjusted by borrowing / repayment of cash to adjust the ending cash balance.

The following is the format of cash budget.

cash budget	April	May	June
Beginning Cash Balance
Add: Cash Collection
Total Cash Available
Less: Cash Disbursement
Inventory Purchase
Labor charges
overhead (excl. Depreciation)
selling expenses
equipment Purchase
Total Cash Disbursement
Excess/Deficiency
Financing:
Borrowing
Repayments
Interest
Total Financing
Ending Cash Balance

Cash receipts are revenue receipts from the sale/service or any kind of receipts from customers.

Cash payments are for purchases, selling and administrative expenses, labor charges and other payments made for purchase of equipment or machinery or furniture.

Excess/deficit is the resulting figure of cash receipts and disbursement.

Excess/deficit of cash is adjusted against ending cash balance by borrowing or repayment along with interest.