Cash Budgets - Invoice Essay Example

Cash Budgets These are used by management as a guide to planning, control and decision-making.

• So we can see when commitments are due so the business can make payments on time, maintaining a good reputation and being able to obtain credit • To show when the business has excess funds which should be invested to earn interest in either the short-term money market, in a fixed term deposit, in government stock or in an investment account (rather than a cheque account) • To control by comparing actual figures to budgeted figures, ensuring costs are kept within target levels • To show if there is a problem with collection of accounts receivable • To show when shortages of funds may occur

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• To allow the business to seek the best source of funds and minimise interest expenses Worked Example Horatio Jones requires a cash budget for June and July 2004.

Estimated figures: | |June |July | |Estimated Payments | | | |Wages |600 |600 | |Cash Purchases |7 400 |8 300 | |Rent |700 |700 | |Estimated Receipts | | | |Cash Sales |15 000 |8 000 | |Interest | |1 000 | There is a debit bank balance at 1 June 2004 of $6000 BRACKET NEGATIVE FIGURES Horatio Jones Cash Budget for June and July 2004 | |June |July | |Estimated Cash Receipts | | | |Cash Sales

|15 000 |8 000 | |Interest | |1 000 | |Total Cash Receipts |15 000 |9 000 | |Estimated Cash Payments | | | |Wages |600 |600 | |Cash Purchases |7 400 |8 300 | |Rent |700 |700 | |Total Cash Payments |8 700 |9 600 | |Bank balance (beginning) |6 000 |12 300 | |Net Cash Inflow |6 300 |(600) | |Closing Bank Balance |12 300 |11 700 | This business has excess cash since the closing bank figures are fairly substantial, some of which should be invested. Budgets are a management tool so we do not have to follow the concept of prudence – if for example, we expect to sell an asset for $15000, we would include that figure in the budget even thought the sale has not yet been finalised. Credit Transactions 1. Debtors (Credit Sales) In the case of Debtors that arise out of Credit Sales, there is a time lag between the sale and the receipt of cash.

The business may allow a discount for prompt payment and may have some bad debts. Usually Debtors are received the month after the credit sale was made. This means that we put January’s credit sales figures in the February column, February’s credit sales figures in the March column and so on. 2. Creditors (Credit Purchases) Again, businesses endeavour to pay creditors in the next month after the credit purchase, benefiting from the discount that the supplier allows. Worked example J Barclay sells goods for cash and on credit. The credit sales are collected in the month following the sale and are granted a 2% discount. The credit sales for December were $84000.

The estimated sales for the next three months are: | |Cash |Credit | |January |32 000 |80 000 | |February |50 000 |112 000 | |March |45 000 |100 000 | Rent received is $3 500 per month. All purchases are made on credit and paid within thirty days from the last day of the month in which the purchase was made. This is to take advantage of a 3% discount. The forecast amount of purchases are: January 84 000 February102 000 March 90 000

Wages amount to $10 000 per month and normal operating expenses amount to $15 000 per month. In addition, it is anticipated that rates and taxes of $13 000 will be paid in January and that land costing $40 000 will be paid for in March. The balances of the following accounts on 1 January are: Cash at Bank $7 000, Accounts Payable$96 000. Answer J Barclay Statement of Cash Receipts from Debtors |Credit Sales in |January |February |March | |December $84 000 |0. 98 x 84000 | | | |January $80 000 | |0. 98

x 80000 | | |February $112 000 | | |0. 98 x 112000 | |March $100 000 | | | | | |82320 |78400 |109760 | To work out these figures, we take the discount off the total figure by multiplying by 0. 98 (since the discount is 2%). However the budget is not being prepared for April, so we do not collect the March Credit Sales in the budget period. J Barclay Cash Budget for January to March 2004

| |January |February |March | |Cash Receipts | | | | |Cash Sales |32 000 |50 000 |45 000 | |Credit Sales |82 320 |78 400 |109 760 | |Rent Received |3 500 |3 500 |3 500 | |Total cash receipts |117 820 |131 900 |158 260 | | Cash Payments | | | | |Credit Purchases |93 120 |81 480 |98 940 | |Wages |10 000 |10 000 |10 000 | |Operating expenses |15 000 |15 000 |15 000 | |Rates and taxes |13 000 | | | |Land | | |40 000 | |Total cash payments |131 120 |106 480 |163 940

| |Bank Balance (beginning) |7 000 |(6 300) |19120 | |Net cash inflow |(13 300) |25 420 |(5 680) | |Closing Bank Balance |(6 300) |19 120 |13 440 | Note that the creditors payment in January is based on December’s credit purchases of $96 000. Because the business paid the debt within 30 days, it received the 3% discount. February and March figures are calculated in a similar manner. From this budget, management can see that in January it must make an arrangement with the bank for an overdraft to cover the needed in January. In February and March, at least $10 000 could be invested in a term deposit, leaving adequate supplies of cash in bank. Exercises 1. On the basis of the following information for M Osmond’s business: a.

Calculate the amounts of accounts receivable for the three months of the budget beginning October. 96000*. 97 b. Calculate the amounts of accounts payable for the same three months. | |Credit Sales |Credit Purchases | |August |90 000 |70 000 | |September |100 000 |75 000 | |October |120 000 |80 000 | |November |100 000 |90 000 | |December |110 000 |70 000 |

Accounts receivable usually settle their accounts in the month following the sale, receiving a 2% discount. Accounts payable are generally paid in the month following purchase, which entitles the business to a 1% discount. 2. From the following information, prepare a cash budget for the four months from September to December 2003 for North Coast Sales. Comment of the budget figures. Debtors from experience, pay their debts in the month following the sale and receive a 2% discount. Credit purchases (creditors) are paid in the month after purchase. A 3% discount is received if this is done. Expenses are paid in the month they are incurred. Debtors from previous months were: August $17 000

The following estimates have been made for the budget period: | |Cash Sales |Credit Sales |Credit Purchases |Wages |Other Expenses | |September |15 000 |22 000 |14 000 |1 500 |900 | |October |14 500 |16 000 |10 000 |1 200 |700 | |November |14 000 |12 000 |11 000 |2 000 |1 500 | |December |15 000 |18 000 |4 500 |1 800 |1 200 | Creditors at the end of August were $6 000 The business plans to install a new refrigeration unit in November at a cost of $112 000. In November $75 000 is to be paid and the balance will be paid in December. No discount is applicable. Interest received on investments amounted to $10 000 and this will be received in September. Bank balance on 31 August is $8 400 in funds. Cash Budget for Sep to Dec for North Coast Sales 1995

| |Sept |Oct |Nov |Dec | |Cash Receipts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |Cash Payments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |Net Cash Inflow | | | | | |Add Opening Bank Balance | | | | | |= Closing Bank Balance | | | | |

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