Topic 7: Cash Budgeting

Cash Budget

A plan that shows expected cash inflows and outflows over a period of time

Purpose of a Cash Budget

To ensure a company has enough cash to meet obligations and avoid shortfalls

Credit Sales

Sales made on account where cash will be collected at a later date

Cash Collections

Cash received from customers for both current and prior credit sales

Collection History

Pattern or schedule showing how much of credit sales are collected in each subsequent month

Example Collection Pattern

20% collected in month of sale, 50% next month, 30% following month

Cash Payments

Cash disbursed by a company to pay for expenses, purchases, or liabilities

Payment Policy

The schedule or pattern in which a company pays its obligations (e.g., pay 50% in current month, 50% next)

Disbursements

Outflows of cash used to settle liabilities or operating costs

Cash Surplus

When expected cash inflows are greater than outflows in a period

Cash Shortfall (Deficit)

When expected cash outflows exceed inflows, requiring financing or adjustments

Borrowing to Cover Deficits

A strategy used in cash budgeting to maintain liquidity when shortfalls are projected

Importance of Timing in Cash Flow

Accurate timing helps avoid unnecessary borrowing and ensures liquidity

Pro Forma Cash Budget

A forward-looking (projected) cash budget used for planning and decision-making

Cash Receipts Schedule

A detailed listing of expected cash inflows from various sources including sales

Cash Disbursements Schedule

A detailed listing of expected cash outflows including purchases and operating expenses

Net Cash Flow

Cash inflows minus cash outflows for a specific period

Ending Cash Balance

Beginning cash balance plus net cash flow for the period

Minimum Cash Balance

The least amount of cash a company wants to have on hand at any point

Cash Budgeting Helps

Anticipate financing needs, plan investments, and manage liquidit