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
• To allow the business to seek the best source of funds and minimise interest expenses
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
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.
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...