Cash Budgets

Submitted by sylvia.wong@up… on Tue, 07/26/2022 - 18:52
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A cash budget is defined as a document that sets out the estimated cash receipts and payments for a future period. Cash budgets are an essential management tool for an organisation to predict liquidity. It is also used as a control tool to manage the payment of debts within the specified timeframes. Therefore, a reliable cash flow is essential to the organisation's survival. 

Enhance your understanding by watching the following 20-minute video, in this case, from South Africa.

A cash budget will only incorporate those items that involve the actual flow of cash, e.g. receipts and payments. However, it is not restricted to revenue and expense items as it can also include capital items such as the purchase and sale of assets, payment of dividends, drawings and repayment of loans. Any items that do not involve a flow of cash are excluded, e.g. depreciation, provision for doubtful debts, bad debts, gains or losses on the sale of non-current assets.1

A diagram showing parts of a cash budget

There are four (4) distinct areas of a cash budget:

  • Opening balance
  • Receipts
  • Payments
  • Closing balance

The closing balance for a previous period in a cash budget becomes the opening balance for the next period. Therefore, the receipts and payments must be calculated separately, and a worksheet for the cash receipts and cash payments budget is prepared before the actual cash budget.2.65) 2    

The GST applies to the sale of most goods and services except for those which are exempt such as:

  • Wages
  • Interest 
  • Residential rent 
  • Education 
  • Some fresh food items. 

When an organisation that has registered for GST makes a sale of its products (e.g. taxable supply), it is required to charge 10% of the sales amount as GST. This amount is paid to the Australian Taxation Office (ATO) and is referred to as “GST payable”. 

When the organisation purchases goods and services, it is charged GST of 10% on the purchase price. This is referred to as “GST input tax” and is offset against the GST payable to the ATO. The net amount is then either remitted to or refunded by the ATO.3 

An organisation may elect to calculate GST on a cash basis or an accrual basis. 

A cash basis may be used where:

  • Annual turnover is less than $2 million
  • Income tax is usually accounted for on a cash basis
  • The Commissioner for Taxation has determined GST can be accounted for on a cash basis.

If a cash basis is applied, GST is calculated on the relevant amounts received or paid during the cash period. With the accrual method, GST is calculated as the value of sales invoiced and relevant expenses charged during the period irrespective of whether cash has been received or paid.1

Enhance your understanding by watching the following 5:34-minute video.

Further Reading  

For more information, see the Website of the ATO.

Reflect on the organisational policies and procedures of your current workplace or those from the University of Queensland.

  1. Make notes about which policies and procedures will likely affect your work budgeting and forecasting for the organisation.
  2. Make additional notes about how you might change those policies and procedures to reflect the day-to-day budgeting and forecasting requirements better.

Make and keep notes for your future reference, as this information will support your assessment and professional practice.

When an organisation makes sales on a credit basis, it must identify when the cash will be received. A schedule can be prepared for this purpose, similar to the example below:

A close view of a vacuum cleaner

Marshall Vacuum Cleaners is preparing its cash inflow budget for the next three months, e.g. January, February, and March. Sales are estimated at $170,000 (January), $180,000 (February) and $190,000 (March) plus GST.

Cash sales for each month are estimated at 50% of total sales. Credit sales are estimated at 50% of total sales. It is estimated that 50% of credit customers will pay in the following month of the sale, and the remainder will pay in the month after that, e.g. February and March for January sales.

Sales Jan $ Feb $ Mar $ Apr $ May $ Qtr $
Total sales 170,000 180,000 190,000      
Credit sales 50% of total sales 85,000 90,000 95,000      
Credit sales 50% total sales 85,000 90,000 95,000     270,000
Credit sales Jan – 50% of total sales   42,500 42,500     85,000
Credit sales Feb – 50% of total sales     45,000 45,000   45,000
Credit sales Mar – 50% of total sales       47,500 47,500 0
Cash collection 85,000 132,500 182,500      
Add GST 10% 8,500 13,250 18,250     40,000
Total cash receipts 93,500 145,750 200,750     440,000

From the schedule above, a cash receipts budget can be prepared for the quarter as follows:

  Jan $ Feb $ Mar $ Qtr $
Total cash receipts 93,500 145,750 200,750 440,000

Example 10: Credit sales and accounts receivable

When determining a budget for cash payments, many of the cash payment figures will be fixed costs. Other payments can be defined as a percentage of sales revenue.

The following is an example of how cash payments can be presented:

Based on our previous example, Marshall Vacuum Cleaners has estimated purchases and payments for the quarter to be as follows:

  • Purchase of inventories is estimated as 25% of sales, e.g. 25% of estimated sales figures for January, February and March.
  • Marketing is estimated as 10% of sales figures
  • Miscellaneous expenses are fixed at $5,000 per month
  • Rent of premises is fixed at $10,000 per month
  • Salaries are fixed at $10,000 per month (GST-free).
  • Sales are estimated at $170,000 (January), $180,000 (February) and $190,000 (March), and the business makes all payments in the month they fall due.
  Jan $ Feb $ Mar $ Qtr $
Cash payments subject to GST        
Purchases 42,500 45,000 47,500 135,000
Marketing 17,000 18,000 19,000 54,000
Miscellaneous expenses 5,000 5,000 5,000 15,000
Rent 10,000 10,000 10,000 30,000
Total 74,500 78,000 81,500 234,000
Add GST 10% 7,450 7,800 8,150 23,400
Total payments subject to GST 81,950 85,800 89,650 257,400
Cash payments not subject to GST        
Salaries 10,000 10,000 10,000 30,000
Total payments 91,950 95,800 99,650 287,400

From the schedule above, a cash payments budget can be prepared for the quarter as follows:

  Jan $ Feb $ Mar $ Qtr $
Total payments 91,950 95,800 99,650 287,400

The cash receipts and cash payment budgets can be incorporated into a single cash budget. 

The following is an example of what the integrated cash budget could look like.

Example

The open cash balance as of 1 January was $35,000. Based on the cash receipts and cash payments budgets, an integrated cash budget can be prepared as follows:

  Jan $ Feb $ Mar $ Qtr $
Total cash receipts 93,500 145,750 200,750 440,000
Total cash payments 91,950 95,800 99,650 287,400
Net surplus/deficit 1,550 49,950 101,100 152,600
Opening balance 35,000 36,550 86,500 35,000
Closing balance 36,550 86,500 187,600 187,600

Example 12: Integrated cash budget

If cash receipt budgets are prepared, a provision for any allowable discounts must be included, as the discount will affect the net profit estimated for each period. 

In the following example, a cash receipts worksheet has been prepared, which has factored in any discount allowed on accounts receivable.

Example

An industrial vacuum cleaner in a factory

Marshall Vacuum Cleaners is preparing its cash inflow budget for the next three months, e.g. January, February, and March. Sales are estimated at $170,000 (January), $180,000 (February) and $190,000 (March).

Cash sales for each month are estimated at 50% of total sales. Credit sales are estimated at 50% of total sales. It is estimated that 70% of credit sales are paid for within a month to take advantage of a 4% discount. The remainder pay in the following month, e.g. 30%. Sales were $160,000 (November) and December ($200,000). GST is calculated on a cash basis.

  Nov $ Dec $ Jan $ Feb $ Mar $ Qtr $
Total sales 160,000 200,000 170,000 180,000 190,000  
Credit sales 50% of total sales 80,000 100,000 85,000 90,000 95,000  
Cash sales 50% total sales 80,000 100,000 85,000 90,000 95,000 270,000
Sales from Nov     24,000     24,000
Sales from Dec      67,200 30,000   97,200
Sales from Jan       57,120 25,500 82,620
Sales from Feb         60,480 60,480
Total     176,200 177,120 180,980 534,000
Add GST 10%     17,620 17,712 18,098 53,430
Total cash receipts     193,820 194,832 199,078 587,730

Note: 50% of total sales are cash, and 50% are credit sales. Sales are only recorded for the quarter, e.g. January to March. Sales for November were $160, 000 of which $80,000 were credit sales. 70% of November sales are received in December and 30% are received in January, e.g.30% of $80,000 = $24,000. 

70% of December sales are received in January (less 4% discount)
(70% of $100,000) x .96 = $67,200
30% of December sales are received in February e.g
30% of $100,000 = $30,000

Example 13: Cash receipts budgets

As per the requirements for a cash receipts budget with a discount provision (Section 5.6), the same principle applies to the cash payments budget. 

In the following example, a cash payments worksheet has been prepared to account for discounts received for purchases paid on credit.    

Example:   

Marshall Vacuum Cleaners is preparing its cash outflow budget for the next three months, e.g. January, February, and March. Payments are estimated at $42,500 (January), $45,000 (February) and $47,500 (March) plus GST. All purchases are made on credit, and only amounts for the quarter are recorded.

80% of credit purchases are paid in the month following the purchase to take advantage of a 4% discount. The remainder is paid for in the following month, e.g. 20%. Purchases were $35,000 (November) and December ($55,000). GST is calculated on a cash basis.

Total purchases Nov $ Dec $ Jan $ Feb $ Mar $ Qtr $
Total purchases 35,000 55,000 42,500 45,000 47,500 135,000
Credit purchases – Nov     7,000     7,000
Credit purchases – Dec     42,240 11,000   53,240
Credit purchases – Jan       32,640 8,500 41,140
Credit purchases – Feb         34,560 34,560
Total     49,240 43,640 43,060 135,940
Add GST 10%     4,924 4,364 4,306 13,594
Total cash payments     54,164 48,004 47,366 149,534

Note: 80% of purchases are paid for in the month following the purchase to take advantage of the 4% discount, and the remainder is paid in the following month.

November sales: 20% of $35,000 = $7,000 paid in January
December sales: 80% of $55,000 less 4% discount
(80% of $55,000) x .96 = $42,240 paid in January
(20% of $55,000) = $11,000 paid in February2

Example 14: Cash payments budget including provision for discount received

In the previous example, a cash budget was prepared using the cash method of accounting for GST.

When applying the accrual method of accounting, GST becomes payable when invoices are issued to customers, not when the cash is received.

The following is an example demonstrating a cash and accrual option for budgets:

Example:   

Using the accrual accounting method, GST is calculated on 10% of sales and purchases made in the current month. Using Marshall Vacuum Cleaners as an example, the accrual option is set out below:

Accrual option:

  Jan $ Feb $ Mar $ Qtr $
GST on sales 17,000 18,000 19,000 54,000
GST on purchases 4,250 4,500 4,750 13,500
ATO payments 12,750 13,500 14,250 40,500

Cash option:

  Jan $ Feb $ Mar $ Qtr $
GST on sales 17,620 17,712 18,098 53,430
GST on purchases 4,924 4,364 4,306 13,594
ATO payments 12,696 13,348 13,792 39,836

Marshall Vacuum Cleaners would have to pay the ATO:

$39,476 using the cash option
$40,500 using the accrual option.

There is no difference in the long term between the amounts paid for GST liability using the methods above. The difference will arise in the timing of the payments to the ATO1

Example 15: Cash budget using the accrual method

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A small business owner working on a budget on a laptop
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