Budgeting Basics and Beyond

6.11. Cash Budget

The cash budget is prepared for the purpose of cash planning and control. It presents the expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs. It aids in avoiding unnecessary idle cash and possible cash shortages. The cash budget consists typically of five major sections:

1. The cash receipts section, which is cash collections from customers and other cash receipts, such as royalty income and investment income.

2. The cash disbursements section, which comprises all cash payments made by purpose.

3. The cash surplus or deficit section, which simply shows the difference between the total cash available and the total cash needed including a minimum cash balance if required. If there is surplus cash, loans may be repaid or temporary investments made.

4. The financing section, which provides a detailed account of the borrowings, repayments, and interest payments expected during the budgeting period.

5. The investments section, which encompasses investment of excess cash and liquidation of investment of surplus cash.

Schedule 8

To illustrate, we will make these assumptions:

• Putnam Company has an open line of credit with its bank, which can be used as needed to bolster the cash position.

• The company desires to maintain a $10,000 minimum cash balance at the end of each quarter. Therefore, borrowing must be sufficient to cover the cash shortfall and to provide for the minimum cash balance ...