CASH BUDGET

Cash Budget
 To find out if the company will be in need of
cash in the coming accounting period and to
have an estimate of how much is needed and
at what particular period that need will arise, a
cash budget must be prepared. A cash budget
shows the expected cash receipts and
disbursements for an accounting period. It can
be prepared on a monthly or a quarterly basis
for a year.
The cash budget has the following parts:
1. Cash receipts. This includes collections from
receivables, proceeds from loans, or issuance of new
shares of stocks and advances from stockholders.
2. Cash disbursements. This section includes
payments to suppliers and other service providers,
payment for loans, and cash dividends.
3. Net cash flow for the period. This is computed by
deducting cash disbursements from the collections for
the period. This provides information regarding the
amount of excess cash or cash deficit for the period.
The cash budget has the following parts:
4. Target cash balance. No business can operate
without cash. This target cash balance is the
amount of cash that management wants to
maintain at all times given its present level of
operations, stability of cash flows, and the
macroeconomic and political conditions. There are
primary and secondary reasons for holding cash
which will be discussed in the next section.
The cash budget has the following parts:
5. Cumulative excess cash or funding requirements.
This is the important part of the cash budget where the
possible funding requirements are shown on a
cumulative basis. This part of the cash budget is very
important in planning because if the management can
estimate the amount of cash they will need in the
future and when it will possibly arise, this early,
management can identify the possible sources of cash.
Planning the possible sources of cash in advance will
save the company financing costs and the
unnecessary stress for managers.
The cash budget has the following parts:
A good problem to deal with is cumulative excess cash.
If the company has excess cash, then management
can decide where to invest the excess funds to
generate more investment income for the company.

To prepare a cash budget, assumptions have to be

made. These assumptions must be based on the
historical performance of the company and plants of the
management.
Illustrative Example: it was December 2014 and the
president of DCD Corporation wanted to find out if
the company has enough cash to pay the principal
balance of the company’s loan worth 3,000,000.00
by the end of 2015. he asked the chief accountant
to prepare a cash budget for 2015.
 The following assumptions which will be used for the
preparation of the cash budget for 2015 are as follows:
1. Projected quarterly sales for 2015 are as follows:
First quarter - P5 million
Second quarter - P7.5 million
Third quarter - P8.5 million
Fourth quarter - P10 million
Fourth quarter sales in 2014 was P8 million.
Ninety percent of sales are collected in the quarter the
sales are made. The remaining 10% is collected the
following quarter.
2. Cost of sales is 75% of sales. Merchandise inventories
are purchased in the quarter these are sold. All
merchandise purchased in the quarter are paid in the
same quarter.
3. Operating expenses for each quarter paid in cash are
as follows:
First Quarter - P500,000
Second quarter - P750,000
Third quarter - P850,000
Fourth quarter - P1,000,000
On top of these cash operating expenses, depreciation
expense to be charged to operations is P150,000 per
quarter
4. Interest expense paid every quarter is P75,000.
5. Income tax rate is 30%. The income taxes to be
paid every quarter will be as follows:
First quarter - P157,500
Second quarter - P270,000
Third quarter - P315,000
Fourth quarter - P382,500
6. Expected cash balance at the end of 2014
is about P350,000. For 2015, target cash
balance is raised to P500,000 because of
expected increase in sales.

Given the above assumptions, a cash budget

can now be prepared for 2015.
Table 3.5: DCD Corporation Cash Budget
For the Year Ending December 31, 2015
 Primary and Secondary
Reasons for Holding Cash
Primary and Secondary Reasons for Holding Cash
The amount of cash to be maintained by the company
is affected by primary reasons and secondary reasons.
The primary reasons for holding cash are for transaction
and compensating balance purposes. A company needs
cash to pay for the following transactions: purchase of
inventories, salaries, utility services, loans, dividends, and
other transactions that affect the business. compensating
balances have something to do with having deposit
accounts and loans with banks. The minimum balance that
a bank requires to keep the deposit accounts with them is
an example of compensating balance. If a company incurs
a loan, the bank will also require a minimum amount of
deposit that has to be maintained with that bank. This is
another example of a compensating balance.
The secondary reasons for holding cash are precautionary
and speculative purposes. If there is an economic crisis,
management may want to maintain a higher level of cash
for emergencies and to serve as buffer for any possible
slowdown in business activities.
A company can also maintain cash for speculative
purposes. When there are economic ang political crises, a
lot of things can be put on sale.
Valuation of real estate properties and stocks traded
in the stock exchanges can go down to
unreasonable levels because owners just want to
get rid of them. For people with cash, these periods
are perfect for opportunities to buy and invest.
In December 1989, the Philippines experienced
its worst coup d’etat under President Corazon
Aquino’s Administration. San Miguel shares then
were trading at about 89.00 per share prior to the
coup. Nineteen eighty-nine was followed by another
turbulent year for the world arising from the Persian
Gulf War. This sent oil prices to very high levels at
that time. As a result, San Miguel shares went down
to levels just above P20 per share. In early 1994,
San Miguel went up to more than P150 per share.

In its 2007 annual report, Berkshire Hathaway,

Inc., the holding company of Warren Buffet, one of
the richest men in the world, had a consolidated
cash balance of more than US$40 billion.
This cash balance is used to buy companies when
good opportunities come in. these opportunities
generally come when there are political and
economic crises. In 2008, at the height of the global
financial crisis, Berkshire Hathaway invested US$5
billion in Goldman Sachs another US$3 billion in
General Electric.