Reformas de la educación

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MODULE 3

Unit 1 Budgeting Techniques

Unit 2 Working Capital Management Unit 3 Project Planning and Control Unit 4 Project Management Tools Unit 5 Computer Applications

UNIT 1

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2.0 OBJECTIVES

At the end of this unit, you will be able to:

 state the purpose of cash budgeting;

  identify various types of cash budgeting; and

  compute cash budget.

3.0 MAIN CONTENT

3.1

Properly preparing your cash budget will show how cash flows in and out of your business. Also, it may then be used in planning your short-term credit needs. In today's financial world, you are required by most financial institutions to prepare cash budgets before making capital expenditures for new assets as well as for expenditures associated with any planned expansion. The cash budget determines your future ability to pay debts as well as expenses. For example, preliminary budget estimates may reveal that your disbursements are lumped together and that, with more careful planning, you can spread your payments to creditors more evenly throughout the entire year. As a result, less bank credit will be needed and interest costs will be lower. Banks and other credit-granting institutions are more inclined to grant you loans under favorable terms if your loan request is supported by a methodical cash plan. Similarly, businesses that operate on a casual day-to-day basis are more likely to borrow funds at inopportune times and in excessive amounts. Without planning, there is no certainty that you will be able to repay your loans on schedule.

However, once you've carefully mapped out a cash budget, you will be able to compare it to the actual cash inflows and outflows of your business. You will find that this comparison will go a long way in assisting you during future cash budget preparation. Also, a monthly cash budget helps pinpoint estimated cash balances at the end of each month, which may foresee short-term cash shortfalls.

3.2 Consistent Budgets

Cash budgeting is a continuous process that can be checked for consistency and accuracy by comparing budgeted amounts with amounts that can be expected from using typical ratios or financial statement relationships. For example, your treasurer will estimate the payments made to your suppliers of merchandise or materials, the payments to employees for wages and salaries, and the other payments that you are obligated to make. These payments can be scheduled by dates so that all discounts will be taken, and so that no obligation will be overlooked

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when it comes due. Cash collections from customers can also be estimated and scheduled by dates along with other expected cash receipts. With careful cash planning, you should be able to maintain a sufficient cash balance for your needs and not put yourself in the position of holding excessive balances of non-productive cash. In the normal course of operations in a merchandising business, for example, merchandise is purchased and sold to customers who eventually pay for the merchandise sold to them. Usually there is a time lag in business operations. It may be necessary to pay the suppliers for merchandise before the merchandise is sold to the customers. Before and during a busy selling season the demand for cash may be higher than the inflow of cash from operations. In this case it may be necessary to arrange short-term loans. When the selling season is over, cash collections from customers will be relatively large and the loans can be paid off.

Other Types of Budget Include:

 Recurrent budget & Capital budgets

 Fixed and Flexible budgets

 Adhoc and Periodic budgets

 Specific and General budgets

 Quantitative and Financial budgets

 Expenses and Revenue budgets

 Operating and Supplementary budgets

3.3

A. ESTIMATED CASH INFLOW

Jan. Feb. March April May June

Cash Sales XX XX XX XX XX XX

Receivable Collection XX XX XX XX XX XX

Sales of Marketable Securities XX XX XX XX XX XX

Other Cash Receipts XX XX XX XX XX XX

Total cash inflow (A) ___ ___ ___ ___ ___ ___

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B. ESTIMATED CASH OUTFLOW

Cash Purchase XX XX XX XX XX XX

Payment of loan XX XX XX XX XX XX

Interest on loan XX XX XX XX XX XX

Taxation and dividend paid XX XX XX XX XX XX

Payable payment XX XX XX XX XX XX

Other payments XX XX XX XX XX XX

Total cash Outflow (B) ___ ___ ___ ___ ___ ___

C. NET CASH FLOW

(A-B) XX XX XX XX XX XX

Opening cash balances XX XX XX XX XX XX

Closing Cash Balances XX XX XX XX XX XX

Less: Min. Closing Balance (XX) (XX) (XX) (XX) (XX) (XX) Cash Surplus / Deficit XX XX XX XX XX XX Example 1 The expected sales and purchases figure of Great Atlantic Ltd. from November 1995 to June 1996 are as follows:

Month Sales Purchases

N N

Nov. ‘95 3,000 2,000

Dec. ’95 3,500 1,000

Jan. ’96 2,500 800

Feb. ’96 2,000 1,000

Mar. ’96 2,500 1,200

April ’96 3,000 1,400

May’96 3,500 1,500

June ’96 3,800 1,500

The company has established a sale policy of 20% cash and 80% credit, 40% and 60% of credit sales are collectable in the first and second month after sales respectively. The company suppliers granted credit

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purchases of 1 month. All company’s purchases were on credit. The company has budgeted for a capital expenditure of N1500 and N300 for the month of March 1996 and April ’96 respectively. Dividend of N1200 is to be paid in three installments starting from April ’96. an outstanding tax liability of N250 is planned to be paid in May ’96. The company has a begin cash balance of N100 and intend to maintain a minimum cash balance of N1500 in each month. Salary for each month will amount to N500.

Required

Determine the cash position of the company from Jan. ’96. Also indicate how much the company has to withdraw from his saving account every month or how much the company must be saved every month?

Solution

A. ESTIMATED CASH INFLOW

Jan. Feb. March April May June

N N N N N N

Cash Sales (Note 1) 500 400 500 600 700 760

Receivables (Note 2) 2560 2480 1840 1760 2160 2560 Total cash inflow (A) 3060 2880 2340 2360 2860 3320 B. ESTIMATED CASH OUTFLOW

Creditors 1000 800 1000 1200 1400 1500

Capital Expenditure - - 150 300 - -

Dividend paid - - - 400 400 400

Tax liability - - - - 250

-Salary 500 500 500 500 500 500

Total cash Outflow (B) 1500 1300 3000 2400 2500 2400 C. NET CASH FLOW

(A-B) 1560 1580 (660) (40) 310 920

Opening cash balances 100 1660 3240 2580 2540 2850 Closing Cash Balances 1660 3240 2580 2540 2850 3770

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Less: Min. Closing Balance(1500)(1500)(1500)(1500)(1500)(1500)

Cash Surplus / Deficit 160 740 1080 1040 1350 2270 Workings