CIMA P1 Syllabus B. Budgeting - Cash Budgets - Notes 5 / 5
Cash Budgets
Cash budgets are vital to the management of cash.
They show the expected inflows and outflows of cash through the company.
They help to show cash surpluses and cash shortages.
It is especially important to maintain a cash balance necessary to meet ongoing obligations.
However, holding cash carries with it a cost – the opportunity cost of the profits which could be made if the cash was either used in the company or invested elsewhere.
Cash management is therefore concerned with optimising the amount of cash available to the company and maximising the interest on any spare funds not required immediately by the company.
Management can therefore use cash budgets to plan ahead to meet those eventualities – arranging borrowing when a deficit is forecast, or buying short-term securities during times of excess cash.
Illustration 1
The accounts receivables at the beginning of next year are expected to be $200.
The budgeted sales for the next year are $1,000.
All budgeted sales will be in cash.
Credit customers pay in the month following sale.
What are the budgeted total cash receipts from customers next year?
Solution
Opening $200
Sales $1,000
Closing ($0)Note:
No closing balance since all sales were in cash.The budgeted total cash receipts from customers will be $1,200 (200 + 1,000).
Illustration 2
The accounts receivables at the beginning of next year are expected to be $200.
The budgeted sales for the next year are $1,000.
60% of the budgeted sales will be on credit and the remainder will be cash sales.
Credit customers pay in the month following sale.
What are the budgeted total cash receipts from customers next year?
Solution
Opening $200
Sales $1,000
Closing (w1) ($50)Working 1:
60% x $1,000 x 1/12 = $50The budgeted total cash receipts from customers will be $1,150 (200 + 1,000 - 50).