Ch. 6 Budgets
6.6 Proforma Cash Budget
Learning Objectives
After finishing this section, students will be able to:
- Create a Proforma Cash Budget.
Proforma Cash Budget
The proforma cash budget is the combined budget of all inflows and outflows of cash. It should be divided into the shortest time period possible. In this book, cash budgets are created based on quarters. In business, cash budgets are often created for weeks or even days. This allows management to be made aware of potential problems resulting from fluctuations in cash flow.
One goal of this budget is to anticipate the timing of cash inflows and outflows, which allows a company to try to avoid a decrease in the cash balance due to paying out more cash than it receives. In order to provide timely feedback and alert management to short-term cash needs, the cash flow budget is commonly geared toward monthly or quarterly figures.
Cash is so important to the operations of a company that, often, companies will arrange to have an emergency cash source, such as a line of credit, to avoid defaulting on current payables due and also to protect against other unanticipated expenses, such as major repair costs on equipment. This line of credit would be similar in function to the overdraft protection offered on many checking accounts.
Because the cash budget accounts for every inflow and outflow of cash, it is broken down into smaller components. The operating budgets all begin with the sales budget. The cash collections schedule does as well. Cash is received from customers at varying rates, so data is needed to estimate how much will be collected in the month of sale, the month after the sale, two months after the sale, and so forth. Bad debts also need to be estimated, since that is cash that will not be collected.
The cash payments schedule plans the outflow or payments of all accounts payable, showing when cash will be used to pay for direct material purchases. While the cash payments schedule is made for purchases of material on account, there are other outflows of cash for the company, and management must estimate all other cash payments for the year. Typically, this includes the manufacturing overhead budget, the sales and administrative budget, the capital asset budget, and any other potential payments of cash. Since depreciation is an expense not requiring cash, the cash budget includes the amount from the budgets less depreciation. Cash payments are listed on the cash budget following cash receipts.
The cash budget, then, combines the cash collection schedule, the cash payment schedule, and all other budgets that plan for the inflow or outflow of cash. When everything is combined into one budget, that budget shows if financing arrangements are needed to maintain balances or if excess cash is available to pay for additional liabilities or assets.
The cash budget totals the cash receipts and adds it to the beginning cash balance to determine the available cash. From the available cash, the cash payments are subtracted to compute the net cash excess or deficiency of cash for the quarter. This amount is the potential ending cash balance. Organizations typically require a minimum cash balance. If the potential ending cash balance does not meet the minimum amount, management must plan to acquire financing to reach that amount. If the potential ending cash balance exceeds the minimum cash balance, the excess amount may be used to pay any financing loans and interest.
| Account |
|---|
| Section 1: Cash Receipts |
| Cash Receipts from Sales |
| Other Cash Receipts |
| Section 1: Total Cash Available |
| Section 2: Cash Disbursements |
| Direct Materials |
| Direct Labor |
| Manufacturing Overhead |
| Selling, General, and Administrative |
| Interest Expense |
| Income Tax Expense |
| Purchase of Asset |
| Section 2: Total Cash Disbursements |
| Section 3: Financing |
| Beginning Cash Balance |
| Surplus/Shortage |
| Borrowing/Repayment |
| Section 3: Ending Cash Balance |
Big Bad Bikes has a minimum cash balance requirement of $10,000 and has a line of credit available for an interest rate of 19%. Money from the line of credit has to be borrowed or paid back at the start of each quarter. Interest is also due at the first of the month.
They also plan to issue additional capital stock for $5,000 in the first quarter, to pay taxes of $1,000 during each quarter, and to purchase a copier for $8,500 cash in the third quarter. The beginning cash balance for Big Bad Bikes is $13,000.
| Big Bad Bikes | |||||
| Proforma Statement of Cash Flows | |||||
| as of December 31, 20×9 | |||||
| – | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total |
|---|---|---|---|---|---|
| Section 1: Cash Receipts | |||||
| Cash from customer | $45,500 | $66,500 | $94,125 | $155,625 | $361,750 |
| Issuing of Stock | 5,000 | 5,000 | |||
| Section 1: Total Cash Available | 50,500 | 66,500 | 94,125 | 155,625 | 366,750 |
| Section 2: Cash Disbursements | |||||
| Direct Materials | 3,060 | 5,620 | 6,560 | 10,000 | 25,240 |
| Direct Labor | 19,500 | 17,250 | 27,000 | 42,000 | 105,750 |
| Manufacturing Overhead | 28,925 | 28,588 | 30,050 | 32,300 | 119,863 |
| Selling, General, and Administrative | 18,500 | 18,500 | 19,750 | 22,250 | 79,000 |
| Interest Expense* | – | $1,107 | $1,460 | $1,472 | 4,039 |
| Income Tax Expense | 1,000 | 1,000 | 1,000 | 1,000 | 4,000 |
| Purchase of Asset | – | – | 8,500 | – | 8,500 |
| Section 2: Total Cash Disbursements | 70,985 | 70,958 | 92,860 | 107,550 | 346,392 |
| Section 3: Financing | |||||
| Beginning Cash Balance | 13,000 | 10,000 | 10,000 | 10,000 | 13,000 |
| Surplus/(Shortage)** | (20,485) | (5,565) | (195) | 58,075 | 20,358 |
| Borrowing/(Repayment)*** | 17,485 | 4,458 | (1,265) | (20,678) | 0 |
| Section 3: Ending Cash Balance | $10,000 | $10,000 | $10,000 | $33,358 | $33,358 |
*Interest Expense Calculation
- Quarter 1: $17,485 * .19 x 4/12 = $1,107
- Quarter 2: $20,350 x .19 x 4/12 = $1,460
- Quarter 3: $23,245 x .19 x 4/12 = $1,472
- Quarter 4: $0 x .19 x 4/12 = $0
** Surplus/(Shortage)
- Quarter 1: $50,500 – $70,985 = ($20,485)
- Quarter 2: $66,500 – $72,065 = ($5,565)
- Quarter 3: $94,125 – $94,320 = ($195)
- Quarter 4: $155,625 – 109,022 = $46,603
***Borrowing/(Repayment)
While you could great a complex Excel formula, I encourage you to visually look at this number and decided how much you can borrow and repay to meet the loan requirements.
6.6a Exercise
Using the information for Monica’s Microphones, create a Proforma Cash Budget for October and November.
| Transaction | Information |
|---|---|
| A | October sales are estimated to be $370,000. The company expects sales to increase at 30% each month. Sales are 40% cash and 60% on account. Monica’s expects to collect 100% of credit sales in the month following the sale. |
| B | Cost of goods sold is 55% of sales. The company desires to maintain a minimum ending inventory equal to 25% of the next month’s cost of goods sold. However, the company wants to have more cash available at the end of November and only having an ending inventory value of $12,750. All purchases are made on account and are paid at 75% in the month purchased and 25% in the following month. |
| C | Store fixtures are purchased on October 1 for $185,400. The fixtures have a salvage value of $5,400 and a four year useful life. |
| D | Budgeted selling and administrative expenses per month are: salaries expense, $18,300; sales commission, 4% of sales; other admin expense, 2% of sales; utilities, $1,700; depreciation on store fixtures, (calculate based on Transaction D); rent, $5,100; and miscellaneous, $1,500. |
| E | Utilities and sales commissions are paid the month after they incurred. All other expenses are paid in the month in which they are incurred. |
| F | The company desires to maintain a $15,000 cash cushion. |
| G | Monica’s has a line of credit that allows them to borrow funds, in increments of $1,000, and repay funds, in any amount available, on the first day of the month. The line of credit charges interest of 24% per month. The interest is paid on the first day of the next month. |
6.6a Homework
The following information is for the beginning months of operation for Friend’s Coffee Factory.
| Transaction | Information |
|---|---|
| A | April sales are estimated to be $350,000. The company expects sales to increase at 30% each month. Sales are 50% cash and 50% on account. Monica’s expects to collect 100% of credit sales in the month following the sale. |
| B | Cost of goods sold is 60% of sales. The company desires to maintain a minimum ending inventory equal to 20% of the next month’s cost of goods sold. However, the company wants to have more cash available at the end of June and only having an ending inventory value of $10,250. All purchases are made on account and are paid at 70% in the month purchased and 30% in the following month. |
| C | Store fixtures are purchased on April 1 for $126,200. The fixtures have a salvage value and a two year useful life. |
| D | Budgeted selling and administrative expenses per month are: salaries expense, $15,300; sales commission, 4% of sales; other admin expense, 2% of sales; utilities, $1,500; depreciation on store fixtures, (calculate based on Transaction C); rent, $4,100; and miscellaneous, $1,700. |
| E | Utilities and sales commissions are paid the month after they incurred. All other expenses are paid in the month in which they are incurred. |
| F | The company desires to maintain a $10,000 cash cushion. |
| G | Friend’s has a line of credit that allows them to borrow funds, in increments of $1,000, and repay funds, in any amount available, on the first day of the month. The line of credit charges interest of 12% annual. The interest is paid on the first day of the next month. |
Instructions
- Using the information from 6.5a, create a Proforma Cash Budget for April, May, and June 20X4.
- Update the interest expense on the Proforma Income Statement created in 6.5a.
Licensing and Attribution:
Content on this page is adapted from the following openly licensed resource(s):
Principles of Accounting, Volume 2: Managerial Accounting by Mitchell Franklin, Patty Graybeal, and Dixon Cooper licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License
is the combined budget of all inflows and outflows of cash. It should be divided into the shortest time period possible, so management can be quickly made aware of potential problems resulting from fluctuations in cash flow.
