Cash Budget

The cash budget is prepared after the operating budgets (sales, manufacturing expenses or merchandise purchases, selling expenses, and general and administrative expenses) and the capital expenditures budget are prepared. The cash budget starts with the beginning cash balance to which is added the cash inflows to get cash available. Cash outflows for the period are then subtracted to calculate the cash balance before financing. If this balance is below the company's required balance, the financing section shows the borrowings needed. The financing section also includes debt repayments, including interest payments. The cash balance before financing is adjusted by the financing activity to calculate the ending cash balance. The ending cash balance is the cash balance in the budgeted or pro forma balance sheet. In keeping with the budgets previously discussed for the Pickup Trucks Company, the cash budget in this example will be prepared on a quarterly basis. In addition to the information in the budgets previously prepared, the following information is needed to complete the cash budget.

  1. The company is expected to end the current year with $20,000 cash, $162,000 in accounts receivable, and $24,862 in accounts payable.
  2. The company's sales are all made on credit, with 70% of the balance collected in the quarter of the sale and 30% in the quarter after the sale.
  3. The company plans to sell a piece of land in the third quarter for $15,000, its book value.
  4. The total cost of raw materials to be purchased (including tires) are: $31,270 in quarter one; $39,530 in quarter two; $60,936 in quarter three; and $69,021 in quarter four.
  5. Raw materials purchases are paid for 60% in the quarter of the purchase and 40% in the quarter after the purchase.
  6. All other cash expenses are paid for in the quarter they are incurred.
  7. Capital expenditures for 20X1 include the purchase of machines for $20,000 in quarter two and $56,000 in quarter three.
  8. Income taxes for the current year are paid quarterly with the final payment being made in the first quarter of the following year.
  9. The company requires a cash balance of $20,000 at the end of each quarter. Arrangements have been made with the bank to borrow if needed in even increments of $1,000. Assume all borrowings are made at the beginning of the quarter. Borrowings are paid back at the end of the next quarter with interest of 8%.

Before preparing the cash budget, the collections from customers and payments for raw materials purchases must be calculated.