Content Standard 12.3

Cash Budget

Belanjawan Tunai

One-hour paid trial · Same-day reply · from RM50/hr

Explanation

The Cash Budget is a forecast statement that shows the estimated cash inflows (receipts) and cash outflows (payments) of a business over a specific period, usually on a month-by-month basis. It is an important internal control tool because it helps a business plan and monitor its cash position before events occur. Unlike the income statement, which measures profit on the accruals basis, the Cash Budget deals only with transactions that involve an actual movement of cash.

A Cash Budget is important for several reasons. First, it helps the owner identify periods that may face a cash shortage so that early action, such as arranging a bank overdraft or a loan, can be planned in advance. Second, it helps plan the use of any cash surplus, for example to invest, buy non-current assets or settle debts. Third, it acts as a standard for comparing actual cash against budgeted cash for control purposes. Fourth, it makes it easier for the owner to decide on the right time to buy assets, pay dividends or extend credit terms to customers.

Cash receipts refer to all cash expected to flow into the business, such as cash sales, collections from debtors (credit customers), additional capital introduced by the owner, loans received, interest received, rent received and proceeds from the sale of non-current assets. Cash payments refer to all cash expected to flow out, such as cash purchases, payments to creditors, wages and salaries, rent, rates, general expenses, purchase of non-current assets, loan instalments, interest on loans and cash drawings by the owner.

A cash surplus occurs when total monthly receipts exceed total monthly payments, while a cash deficit occurs when total payments exceed total receipts. Note that this surplus or deficit refers only to the net cash flow of the month concerned. The closing cash balance for each month is calculated using the formula: Opening cash balance + Receipts - Payments = Closing cash balance. The closing balance of the current month becomes the opening balance of the following month. A negative closing balance shows that the business is short of cash and may need a bank overdraft.

To prepare a Cash Budget, items are listed by month in a columnar format. The top section lists all receipts and their total, followed by all payments and their total. Non-cash items such as depreciation, bad debts, provision for doubtful debts and discounts are excluded because they do not involve any actual movement of cash. Once the budget is prepared, the owner must interpret the results and give recommendations. For example, if the budget shows a deficit in a certain month, recommendations may include delaying the purchase of assets, speeding up the collection of debtors, reducing drawings or negotiating a bank overdraft. If there is a large idle surplus, the recommendation is to invest it or buy productive assets.

Worked examples

Preparing a Cash Budget (Maju Jaya Retail Store)

Maju Jaya Retail Store estimates the following for January and February. The opening cash balance on 1 January is RM3,000. Expected receipts: cash sales RM8,000 (Jan) and RM9,500 (Feb); collections from debtors RM4,000 (Jan) and RM5,000 (Feb). Expected payments: cash purchases RM6,000 (Jan) and RM7,000 (Feb); payments to creditors RM3,000 (Jan) and RM3,500 (Feb); salaries RM2,000 each month; rent RM1,000 each month.

JANUARY: Total receipts = RM8,000 + RM4,000 = RM12,000. Total payments = RM6,000 + RM3,000 + RM2,000 + RM1,000 = RM12,000. Surplus/(deficit) = RM12,000 - RM12,000 = RM0. Closing balance = RM3,000 + RM0 = RM3,000.

FEBRUARY: Total receipts = RM9,500 + RM5,000 = RM14,500. Total payments = RM7,000 + RM3,500 + RM2,000 + RM1,000 = RM13,500. Surplus = RM14,500 - RM13,500 = RM1,000. Closing balance = RM3,000 (Feb opening) + RM1,000 = RM4,000.

Effect of depreciation (a non-cash item) is ignored

Sinar Murni Enterprise buys a van on 1 March for RM30,000 cash and charges depreciation of RM500 per month. In the Cash Budget for March, only the cash payment of RM30,000 to buy the van is recorded as a payment.

The depreciation of RM500 per month is NOT recorded in the Cash Budget because it is a non-cash item and does not involve any actual movement of cash. Depreciation is recorded only in the Income Statement and the Statement of Financial Position.

Interpretation and recommendation

Suppose Restu Enterprise's Cash Budget shows a negative closing balance of (RM2,500) in April because a cash purchase of equipment of RM10,000 is scheduled for that month.

Interpretation: the business will face a cash shortage in April. Recommendation: postpone the equipment purchase to a month with a surplus, buy the equipment on instalment/credit, speed up collections from debtors, or negotiate a bank overdraft so that daily operations are not disrupted.

Practice

State three benefits of a Cash Budget to a business.

Answer: (1) It helps the business identify periods that may face a cash shortage so that early action such as arranging an overdraft or loan can be planned. (2) It helps plan the use of any cash surplus, for example to invest, buy non-current assets or settle debts. (3) It acts as a standard for comparing actual cash against budgeted cash for internal control. (Also acceptable: it helps decide the right time to buy assets or pay dividends.)

Cahaya Enterprise has an opening cash balance of RM2,000 on 1 May. Estimates for May: cash sales RM7,000, collections from debtors RM3,000, cash purchases RM5,000, payments to creditors RM2,500, salaries RM1,500. Calculate total receipts, total payments, surplus/deficit and the closing cash balance for May.

Answer: Total receipts = RM7,000 + RM3,000 = RM10,000. Total payments = RM5,000 + RM2,500 + RM1,500 = RM9,000. Surplus = RM10,000 - RM9,000 = RM1,000. Closing cash balance = RM2,000 + RM1,000 = RM3,000.

Explain why depreciation and bad debts are not included in a Cash Budget.

Answer: Depreciation and bad debts are non-cash items. They do not involve any movement of cash into or out of the business. A Cash Budget records only transactions that involve cash receipts or payments. Therefore non-cash items such as depreciation, bad debts, provision for doubtful debts and discounts are excluded. These items are recorded in the Income Statement, and some also affect the Statement of Financial Position (for example accumulated depreciation and the provision for doubtful debts).

Damai Enterprise's Cash Budget shows a negative closing cash balance of (RM1,800) in August because it plans to buy a laptop for RM4,000 cash that month. Give an interpretation and two recommendations.

Answer: Interpretation: The business will face a cash shortage/deficit in August, that is, cash paid exceeds cash received so that the balance becomes negative. Recommendations: (1) Postpone the laptop purchase to a month with a cash surplus, or buy it on instalment/credit. (2) Speed up collections from debtors or negotiate a bank overdraft so the business has enough cash for daily operations.

Exam tips

Key terms

Cash Budget (Belanjawan Tunai): A forecast statement showing estimated cash receipts and payments for a period, used to plan and control the cash position.
Cash receipts (Penerimaan tunai): All cash expected to flow into the business, such as cash sales, collections from debtors and loans received.
Cash payments (Pembayaran tunai): All cash expected to flow out, such as cash purchases, payments to creditors, salaries and purchase of assets.
Surplus/deficit (Lebihan/kurangan): The net cash flow of a month; a surplus when receipts exceed payments, a deficit when payments exceed receipts.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

Need help with Cash Budget?