Accounting Business Reporting for Decision Making

CHAPTER 9 Budgeting 397

To illustrate the calculations in the schedule, if we take the actual December sales of $303 000,

50 per cent will be received in the month following the sale (January); 40 per cent in the second month

(February); and the final 10 per cent in the third month (March).

Step 4: Prepare the cash budget.

Cash budget for the three months ending 31 March 2019

January February March Total

Cash receipts

Receipts from accounts receivable $ 285 300 $ 214 400 $ 137 300 $ 637 000

Total cash receipts 285 300 214 400 137 300 637 000

Cash payments

Payments to suppliers

Direct labour

Manufacturing overhead

Warehouse and distribution expenses

Sales and marketing expenses

Administrative expenses

120 000

20 000

6 500

4 000

5 600

3 250

52 000

16 500

5 100

7 000

4 900

3 000

44 000

15 000

4 500

7 600

3 800

2 500

216 000

51 500

16 100

18 600

14 300

8 750

Total cash payments 159 350 88 500 77 400 325 250

Net cash flow 125 950 125 900 59 900 311 750

Bank balance at start of month 59 310 185 260 311 160 59 310

Bank balance at end of month $ 185 260 $ 311 160 $ 371 060 $ 371 060

From the receipts from accounts receivable schedule

Total cash receipts less total cash payments

Note that this is the bank balance at the end of March. This bank balance row is not totalled.

You will notice that the bank balance at start of month row is not totalled across. In the totals column

the opening bank balance is used. Therefore, in the last column we show the total net cash flow for the

period ($311 750) and then add the opening cash balance ($59 310) to estimate the final bank balance of

$371 060.

Note that the focus is on cash-related items. Therefore, the distribution-related expenses to be paid in

April are excluded; the marketing expense of $4200 is still included as it has been paid in the period;

depreciation is not included as it does not require a cash flow; and the loan interest is excluded as it will

not be paid until April. Finally, notice that the bank balance at the end of one month becomes the bal-

ance at the start of the next month.

The preparation of the cash budget will enable Coconut Plantations’ management to assess the

liquidity of the business, given estimates of cash flow in the coming months. A review of Coconut

Plantations’ cash budget shows an expected positive cash position at the end of each period based on

the estimates given. Coconut Plantations’ management would need to assess the minimum cash balance

required and then determine how best to manage any surplus cash. Given that the budget is prepared

before the actual event, Coconut Plantations’ management has the time to compare possible investment

options. However, the availability of the ‘surplus’ cash is dependent on actual cash flows being in line

with estimated cash flows.