How to prepare a cash budget ?

freeze4real

Hello guys I'm having an accounting exam in a weeks time and I'm stressed out.

I'm working on a budgeting question.

And indont know where to start from.

So wha are the steps in drafting a cash budget or solving one.


Thanks

smcgiff

Briefly,

Start with an opening cash balance.

Then break it down into periods i.e. weeks/months.

Add your cash in - this will need to be broken down into periods. Debtors (based on cash received trends and budgeted sales for the period), VAT refunds, grants, Shareholder funding, share issues, loans.

Deduct, Supplier payments, PAYE/VAT, Salaries, dividends, loan repayments.

Ignore non cash items such as depreciation.

Closing balance will = Opening balance + total of all receipts - Outgoings.

freeze4real

Thanks it's taking me 2hrs just to do a question.

smcgiff

freeze4real wrote: »

Thanks it's taking me 2hrs just to do a question.

That's because you're learning something for the first time. If you had a similar question/task to this one in future you would do it in a fraction of the time.

Good luck

freeze4real

smigiff,

In an accounting book the opening capital was added or use as opening balance.

But my lecturer addded opening balace or placed it under the surplus or deficit section.

which is the right way ?

or is there a difference between opening balance or capital ?

smcgiff

Howdy,

In response - I've started so I better finish


Can you post up the question you have in mind? I'm concerned I pick you up wrong and maybe the word capital is being used in a way I'm not familiar with such as with a start up company.

If the question refers to Capital introduced (as in cash) then this is the equivalent of shareholder funding and would be included in your cash budget.

But, I've my concerns about what Opening Capital could be. Say, for example, a sole trader brought in his own private car into the business. That could be Dr Fixed Assets Cr Capital, but there would be no increase in Cash. Hope this makes sense (it is early in the morning!)

freeze4real

its too early but it has to be done by me. haha

this is the question.

smcgiff

'The cash balance at the beginning of September 2010 is forecast at €10,230'

That's your opening balance - €10,230.

Looks straight forward enough. You're given enough info re the timing of the cash flows. Should take you 10 mins max. Don't forget to ignore non cash outflows inflows.

Good luck

freeze4real

Thanks. Do does cash balance and capital different ?

Because you start off with capital for a business. And as in the case if aspire ltd it starts of with €10230.

smcgiff

Hi,

Why are you assuming Aspire is a start up? It could be trading for the last 50 years. The question states they expect to have €10,230 cash at the start of September - that's all you know.

It doesn't state in the question the €10,230 is a cash injection from the shareholders and is simply what's expected to be in the bank at the start of September.

Unless it was a start up and the first thing the company did was inject funds into the bank without any other transactions then that's the only time Capital will equal cash in bank. Otherwise there's no other connection. This is a longwinded way of saying don't think about Capital when it comes to cash budgets.

freeze4real

Thanks. I'm an accounting noob so these things confuse me easily.

smcgiff

Given the info in the question the comany is trading well before September, so the €10,230 is no way connected to Capital.

smcgiff

freeze4real wrote: »

Thanks. I'm an accounting noob so these things confuse me easily.

Posts crossed. Have fun!

freeze4real

My lecturer said stuff like overhead and depreciation do not go into the cash budget.

Why is this so.

What other payments do not go into the cash budget.


Thanks a mill man

SBWife

Depreciation is not a payment. It's an expense.

eg. I buy a car for €3000 using cash with a useful life of 3 years. My depreciation policy is straight line.

The Cash goes out when I buy the car. I give €3000 to the car sales guy.

At this time my cash account is decreased by €3000 BUT my property, plant and equipment account is increased by the same amount.

A year passes during which I use the car. The remaining life is now 2 years - so essentially I've used €1000 of the value of the car. This €1000 is my depreciation expense HOWEVER at this point there's no cash changing hands the expense is charged against the previous €3000 in the PPE account.

smcgiff

freeze4real wrote: »

My lecturer said stuff like overhead and depreciation do not go into the cash budget.

For your lecturer's sake I hope you've picked him up wrong - overhead is a term used in relation to the running costs of a business. These could either be cash or non cash expenses. SBWIFE has explained depreciation.

It's simple really - whatever transaction you come across, ask yourself if it will mean money is paid out straight away. At the early stages of your studies it's likely depreciation is the one you'll come across in an exam.

Other examples would be provisions, accruals and such as notional interest. While these will affect profit they do not represent cash movements.

freeze4real

Sorry my bad yea Overgead do go in. I thought debenture interest would go in a cash budget as well.

smcgiff

freeze4real wrote: »

Sorry my bad yea Overgead do go in. I thought debenture interest would go in a cash budget as well.

PAID - Yes
ACCRUED - No

Now, have you finished the question yet :cool:

freeze4real

Thanks man. You're a legend.