Accounting Business Reporting for Decision Making

CHAPTER 9 Budgeting 395

ILLUSTRATIVE EXAMPLE 9.10

Mountain Blue Bikes selling and administrative expense budget

Mountain Blue Bikes

Selling and administrative expense budget for the year ended 31 December 2016

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Administration

Marketing

Distribution

Customer service

$4 000 000

4 000 000

1 250 000

375 000

$4 000 000

2 000 000

1 250 000

375 000

$4 500 000

3 000 000

1 250 000

375 000

$4 000 000

1 000 000

1 250 000

375 000

$ 16 500 000

10 000 000

5 000 000

1 500 000

Total production overhead $9 625 000 $7 625 000 $9 125 000 $6 625 000 $ 33 000 000

Anni will review the budget with the entity’s financial controller and the budget documents will then

be presented to the CEO and other department heads for consideration.

9.5 The cash budget

LEARNING OBJECTIVE 9.5 Prepare a schedule of receipts from accounts receivable and a cash budget.

Another important budget that is prepared is the cash budget. A cash budget is a statement of expected

future cash receipts and cash payments, and enables the calculation of expected cash balances. A cash

budget prepared on a month-by-month basis over the budget period is preferable as it provides more

timely information and enables closer monitoring of the cash position. The cash budget is a key com-

ponent of the master budget and assists decision making by:

• documenting the timing of all estimated cash receipts and cash payments


• helping to identify periods of expected cash shortages, so corrective action can be taken


• helping to identify periods of expected cash surpluses, so short-term investments can be considered


• identifying suitable times for the purchase of non-current assets


• assisting with the planning and use of borrowed funds


• providing a framework for ‘what if’ analysis.

Like the statement of cash flows studied in chapter 7, the cash budget focuses on cash-related items.

Cash is often referred to as the lifeblood of any entity. Consequently, the use of the cash budget as a

planning tool is critical in terms of providing direction, and setting financial targets and the benchmarks

against which performance will be evaluated. When prepared on spreadsheets, the cash budget allows

alternative scenarios on the cash position of the entity to be considered. The preparation of a cash budget

will identify any liquidity issues and ensure that the entity always has access to cash either through cash

from operating activities or, if needed, financing.

Illustrative example 9.11 demonstrates the preparation of a cash budget for Coconut Plantations Pty Ltd.

ILLUSTRATIVE EXAMPLE 9.11

Preparation of a cash budget

Coconut Plantations Pty Ltd is a small manufacturer of coconut based products for sale to wholesalers

and retailers in Australia. Production and sales are seasonal with most activities occurring towards the

later end of the year as customers build inventory for the summer holiday period. All sales are provided

on 30-day credit terms. The cash balance at 1 January 2019 was $59 310. The following estimates have

been made with respect to the first three months of operation in 2019.

Step 1: Assess expected trading and operating conditions and gather all the necessary information.

Step 2: Prepare initial budget estimates and communicate with managers.