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Cash Budgets

Managing cash flow is crucial for business success, as cash, rather than income, is needed to meet obligations. The cash receipts budget outlines expected cash inflows from sales and collections, highlighting the timing differences between sales and cash collections. Small business owners often prioritize cash flow management, with many expressing concerns about customer payments and funding for growth.

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Ailyn Mercado
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11 views2 pages

Cash Budgets

Managing cash flow is crucial for business success, as cash, rather than income, is needed to meet obligations. The cash receipts budget outlines expected cash inflows from sales and collections, highlighting the timing differences between sales and cash collections. Small business owners often prioritize cash flow management, with many expressing concerns about customer payments and funding for growth.

Uploaded by

Ailyn Mercado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CASH BUDGETS

Why Focus on Cash?

Many managers consider managing cash flow to be the single most important consideration in running a
successful business. After all, cash, not income, pays the bill. Whereas income (earnings per share) is
often important to external investors, cash flow often takes center stage for managers.

The timing of cash inflows and outflows is critical to the overall planning process. When cash inflows are
delayed because of the extension of the credit to buyers, there may not be sufficient cash to pay
suppliers, creditors, and employee wages. Timely payment is necessary to maintain good business
relationships with suppliers (and to keep employees happy) and to take the maximum discounts that
may be available on purchases. Cash budgeting forces managers to focus on cash flow and to plan for
the purchase of materials, the payment of creditors, and the payment of salaries. Sufficient cash must
be available to pay dividends to stockholders and to acquire new fixed assets. As can be seen in the
example in the next section, cash budgets also point out the need for borrowing cash or when excess
cash can be invested or used to repay debt.

The Cash Receipts Budget

The first cash budget that must be prepared is the cash receipt budget. The cash receipts budget shows
cash receipts that are generated from operating activities- cash sales of inventory or services and
customer payments on account. Other cash receipts (from the sale of property, investment income, and
so on) are included in the summary cash budget.

All the sales of Tina’s Fine Juices are on account. Based on experience in previous years, Tina’s estimates
that 50 percent of the sales each month will be paid for in the month of sale. Tina’s also estimates that
35 percent of each month’s sale will be collected in the month following sale and that 15 percent of
each month’s sales will be collected in the second month following sale. As you will recall from the sales
budget (Exhibit 9-5), sales for January, February, and March were projected to be $262,500, $341,250,
and $472,500, respectively. Because collections lag sales by up to two months (some of November’s
sales will not be collected until January, and some of December’s sales will not be collected until
February), completing the cash receipts budget also requires that we include sales for November and
December. November’s sales were $200,000, and December’s sales were $250,000.

The preparation of the cash receipts budget is straightforward once the payment scheme is set. In each
month, we collect 50 percent of that month’s sales (50 percent of January’s sales are collected in
January), 35 percent of the previous month’s sales (35 percent of December’s sales are collected in
January), and 15 percent of the second previous month’s sales (15 percent of November’s sales are
collected in January). Then the payment scheme is repeated for the remainder of the months in the
budget. A cash receipts budget for cash received from operating activities is presented in Exhibit 9-13.

A closer look at the cash receipts budget shows that budgeted cash receipts are significantly different
from budgeted sales revenue. In February and March, cash receipts are expected to be less than sales
revenue. When sales are increasing and there is a lag between sales and the collection of cash, this is
usually the case.
CASH IS KING

Even in good times, cash flow is frequently a concern for small business owners. In a survey conducted
by American Express, 62 percent of small business owners said managing cash flow was a priority. Of
those with cash flow concerns, 35% said getting customers to pay their bills was their most significant
worry, followed by 26 percent who worried about paying their own bills. Making sure there was enough
cash on hand to fund expansion and growth was a concern for 22 percent of respondents. How do small
business owners meet cash shortages? Thirty percent said they would delay purchases, 24 percent said
they would use a credit line, and 18 percent said they would use a business credit card.

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