This blog is purely for cash budgets. For all other budgets
click here
A cash budget (or cash flow forecast) is a forecast of
predicted revenues and expenditures.
They
have benefits in that they allow firms to: -
- Plan ahead by
arranging finances if needed (look at any closing balances which are negative –
they are overdrawn – not making a loss!!!)
- Control expenditure
if things are not going to plan
- Monitor
performance and take corrective action if needed
- Motivate
staff (bonuses?) if the targets are challenging but achievable (SMART
targets).
- Target setting so
that employees have similar goals to work towards which should benefit
the company overall
- Variance analysis can
be performed. You can compare
actual figures with expected ones and then make changes for the future base on
this past information
- Perform ‘what
if’ scenarios to evaluate potential issues
However cash
budgets
- Are based on historic
data – things change such as the external environment (interest rates, new
government, competitors actions)
- May be unrealistic and thus may demotivate staff who may not attempt to achieve them
- Are only a forecast
and can still be wrong! They are only as
good as the data used by the people setting them.
- Can be made too easy so that people will not have to push to
achieve it. Alternatively they could be
so hard that people do not even try.
- Could mean that staff may only work towards the target rather
than the true goal – e.g. sales targets over profitability especially if they receive
bonuses based around the targets.
To complete a very simple cash budget:-
Opening balance
Add inflows (list them separately)
Minus outflows (list them separately
Closing Balance (this is next month’s opening balance)
Notes: -
- Some budget layouts will have a net inflow which is the
difference between the inflows and outflows.
This is added to the opening balance (a negative figure will reduce the
closing balance.
- The inflows and outflows are when cash is paid or received –
not when a sale or purchase is made or when any income or expense is accrued.
- Watch out for non
cash expenses such as depreciation
or bad debts. These do not go in
the cash budget as no cash has flowed in or out.
Credit sales or payments
•
Watch out for credit sales and purchases! In a cash budget the amounts go in the month
you receive or pay for it!
•
For example January’s Credit sales of £100, 20% is cash and
the rest credit sales (1 month's credit) February’s sales is £150.
March’s cash sales go in March but credit sales not till April. Only do the number of months needed!!!
Jan Feb March
Cash Sales 20 30
Credit Sales
80 120
Look at the colours above to match up with when it was sold!
A sample cash budget for a new Business – Nial Satis Sports
Commentary on the cash budget
Nial Satis is overdrawn at the end of each of the first 3
months (negative bank balance). This is
cause by high purchases (probably to set up the business and have enough
initial inventory and paying for the equipment when he begins trading in
January These are known as set up
costs. The net cash flow for each month
after this are all positive meaning he has more flowing in than out each
month. By the end of April Nial has a
positive bank balance.
Nial must ensure he negotiates an overdraft of up to around £6000.
This is because this is a forecast and may not be accurate. If the outflows are higher or the inflows
lower then he may have a higher overdraft each month and may still be overdrawn
at the end of April if the figures are worse by more than £180. Overall Nial’s liquidity is improving.
Note that there is no mention of profit. A cash flow forecast / budget does not show
this (although it may be possible to work out).
You need an income statement for this
