Ans. CASH BUDGET
A
Cash Budget is a summary statement of the firms’ expected cash inflows and
outflows over a projected time period. In other words, cash budget involves a
projection of future cash receipts and cash disbursements over various time intervals.
While
preparing cash budget seasonal factors must be taken into account and in
practice cash budget is prepared on a monthly basis. The availability of other
budgets is tested in terms of cash availability. Cash budget is also called as
cash flow statement which indicates cash inflow and cash outflows. It is
generally prepared for a maximum period of one year.
A
cash budget helps the management in (i) determining the future cash needs of
the firm, (ii) planning for financing of the needs; (iii) exercising control
over cash and liquidity of the firm.
The
overall objective of a cash budget is to enable the firm to meet all its
commitments in time and at the same time prevent accumulations of unnecessary
large balance with it.
Methods of
Preparing Cash Budgets
There
are basically three methods for preparing cash budgets.
1)
Receipts and Payments Method
2)
Adjusted Profit and Loss Account Method
3)
Balance Sheet Method Let us study about these methods in brief.
1)
Receipts and Payments Method
Under
this method, all receipts are added and out of the total, the sum of all
payments is deducted to arrive at the balance in hand. The closing balance in
hand say, for a particular month is the opening balance of the next month and
is added to the total of receipts so as to know the total availability of cash
during the month. The receipts and payments during the budget period are found
out from various functional budgets prepared. The credit allowed to debtors,
the credit allowed to us by suppliers, the delay in payment of wages and other
expenses etc. are the factors, which are taken into account to determine the
timing of receipts and payments. Advance payments and receipts are to be
included but the payment in abeyance and income accrued on outstanding are
excluded from cash budget. Revenue as well as capital receipts and payments are
recorded in cash budget.
2) Adjusted Profit and Loss Account Method
The
budgeting done by Adjusted Profit and Loss account method is known as cash flow
statement and is more suitable for long-term forecasting. Under this method
profit is taken as equivalent to cash and necessary adjustments are done in
respect of non-cash transactions. The net estimated profit is taken as the base
and non-cash items like depreciation, outstanding expenses, provisions etc.
already deducted to arrive at the net profit are added back. The capital
receipts, reduction in debtors, stocks, increase in liabilities, issue of share
capital and debentures are other items which are added to compute the total
cash receipts. The payments of dividends, prepayments, capital payments,
increase in debtors, increase in stock and decrease in liabilities are deducted
out of the total cash receipts. The profit adjusted this way denotes the
estimated cash available.
3)
Balance Sheet Method Under this method
at
the end of budget period a projected balance sheet is drawn up setting out the
various assets and liabilities, except cash and bank balances. The balancing
figure would be the estimated closing cash/bank balance. Thus, under this
method, closing balances other than cash/bank will have to be found out first
to be put in the budgeted balance sheet. This can be done by adjusting the
anticipated transaction of the year in the opening balances. If the liabilities
are more than assets, this reveals a balance of cash/bank and if assets exceed
liabilities, it reveals a bank overdraft. Thus, under Adjusted Profit and Loss
method, the amount of cash is computed by preparing a Cash Flow Statement and
the same amount is computed as a balancing figure under Balance Sheet method.
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