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Cash Budget: Plan and Aspects


A budget is a set of combined plans that describes the organizations forecasted future operations quantitatively. Budgets are often used by organizations as a yardstick to measure actual operations, allocate funds and also plan for future operations. Overtime, it has proved to be an excellent management tool since on its preparation, the desired goals has to be set out. Managers will translate the desired goals into plans which in turn are laid down in a budget and with time keep on reviewing the progress and any deviation that arises is rectified accordingly.

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Budget and budget process

Budget refers to a quantified financial expression of the expected income and expenditure relating to a defined future period (Hongren et al, 2009). In addition, the budgeting process encompasses preparation, implementation and assessment of the plan laid down for the purposes of providing services and goods (Bettner & Calcello, 2010). A sound budget process helps in realization of the company’s goals. For it to facilitate this, it should have a long-term perspective that connects company’s overall goals, show budget decisions as a tool to help in attainment of the desired goals, facilitate effective communication with various players. More so, it should act as an incentive to the employees. The modern budget process goes beyond the traditional model since it brings together a plan that allocates available resources based on the identified goals.

The budget process starts with the committee charged with the responsibility of preparing budget and laying down strategic plan which is in line with the company’s vision. Such strategic plan generates the company’s goals for the period in question which is to be funded. After setting out the goals, the committee should project the revenues to be collected within the budget period, which facilitates the company’s growth (Dugdale, 1994). Fixed and variable costs should also be projected in determination of minimum expenses that do not change and those that changes but needs to be funded in the budget. Goals set out in the budget should be well outlined, and the costs projected for the attainment of these goals. The projections made should be incorporated into the departmental budget that carries the responsibility of attainment of the goal. To allow for the investors returns, target profit should be provided for. At this stage, the forecasts are presented to the governing board or the head of the organization. Upon reviewing the forecasts and having determined that they are in line with the entity’s goals, the budget is approved, but the budget review must continue.

Budgets as a tool for achieving strategic goals and objectives

Competitive Advantage

Budgets have overtime proved to be important tools in realization of the organization’s strategic objectives. Organizations which are guided by budgets in implementing their plans tend to have a competitive advantage over others since it possess a workable plan of achieving its desired goals. Whenever a deviation is noted, corrective measures should be taken on time. (Hongren et al 2009)

Strategic planning

Managers can use budgets to set the future strategic direction of the company which can be realized by adopting realistic goals which are fundamental in the planning process. Preparation of budget requires coordination of all organizational activities. When coordination is effectively done, it draws the plans of the managers in line with the entity’s goals, thereby leading to attainment of the set organizational goals.


Budgets can be used by the managers in monitoring the implementation of the plans and taking corrective actions where necessary (Tomkins & carr, 1996). After preparing the budgets, the accounting system offers information to managers that helps in monitoring the actual financial performance. This actual financial performance is compared to the budget and remedial action is taken where necessary.

Coordination and Motivation

In an organization, different departments are charged with different responsibilities and the budget helps in coordination of the various activities of these departments thereby facilitating attainment of organizations objectives. Budgets are important framework for responsibility accounting in that, managers of budget centers are made responsible for achievement of budget targets for the operations under their control (Bettner & Carcello, 2010). Budgets work as a benchmark against which actual results are compared thus workers strives to work with intention of meeting the set targets (Tomkins & Carr, 1996).

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Details Jan-11 Feb-11 Mar-11 Apr-11 Total
Sales Receipts – Nov 11 440,000.00 440,000.00
Dec-11 1,150,000.00 460,000.00 1,610,000.00
Jan-12 750,000.00 1,250,000.00 500,000.00 2,500,000.00
Feb-12 810,000.00 1,350,000.00 540,000.00 2,700,000.00
Mar-12 840,000.00 1,400,000.00 2,240,000.00
Apr-12 900,000.00 900,000.00
Apr-12 11,400,000.00 11,400,000.00
2,340,000.00 2,520,000.00 2,690,000.00 14,240,000.00 21,790,000.00
Purchases – 50% of sales 1,170,000.00 1,260,000.00 1,345,000.00 7,120,000.00 10,895,000.00
Purchases – Nov 11 392,000.00 392,000.00
Dec-11 657,000.00 438,000.00 1,095,000.00
Jan-12 702,000.00 468,000.00 1,170,000.00
Feb-12 756,000.00 504,000.00 1,260,000.00
Mar-12 807,000.00 807,000.00
2,219,000.00 2,400,000.00 2,569,000.00 8,431,000.00 15,619,000.00
Salaries & Wages 475,000.00 475,000.00 475,000.00 475,000.00 1,900,000.00
Advertisement 25,000.00 25,000.00 25,000.00 25,000.00 100,000.00
Warehouse rent 100,000.00 100,000.00 100,000.00 100,000.00 400,000.00
Insurance 20,000.00 20,000.00 20,000.00 20,000.00 80,000.00
Utilities 30,000.00 30,000.00 30,000.00 30,000.00 120,000.00
Sales commission 219,000.00 234,000.00 252,000.00 269,000.00 974,000.00
Other expenses 50,000.00 50,000.00 50,000.00 50,000.00 200,000.00
Corporation Tax 190,000.00 190,000.00 190,000.00 190,000.00 760,000.00
Acquisition cost 600,000.00 600,000.00
1,109,000.00 1,124,000.00 1,142,000.00 1,759,000.00 5,134,000.00
Total Expenses (3,328,000.00) (3,524,000.00) (3,711,000.00) (10,190,000.00) (20,753,000.00)
Total Receipts 2,340,000.00 2,520,000.00 2,690,000.00 14,240,000.00 21,790,000.00
Total Payments (3,328,000.00) (3,524,000.00) (3,711,000.00) (10,190,000.00) (20,753,000.00)
Balance b/d (988,000.00) (1,004,000.00) (1,021,000.00) 4,050,000.00 1,037,000.00
Balance c/d (2,449,000.00) (3,437,000.00) (4,441,000.00) (5,462,000.00) (15,789,000.00)
(3,437,000.00) (4,441,000.00) (5,462,000.00) (1,412,000.00) (14,752,000.00)

Table 1- Cash budget for Sweety Ltd for Jan to April 2011.


Computation of sales receipts:

Jan: 20% of 2,100,000.00 = 440,000.00

50%of 2,300,000.00 = 1,150,000.00

30% of 2,500,000.00 = 750,000.00

Feb: 20% of 2,300,000.00 = 460,000.00

50%of 2,500,000.00 = 1,250,000.00

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30% of 2,700,000.00 = 810,000.00

Mar: 20% of 2,500,000.00 = 500,000.00

50%of 2,700,000.00 = 1,350,000.00

30% of 2,800,000.00 = 810,000.00

Apr: 20% of 2,700,000.00 = 540,000.00

50%of 2,800,000.00 = 1,400,000.00

30% of 3,000,000.00 = 900,000.00

Computation of purchases:

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Jan: 40% of 980,000.00 = 392,000.00

60% of 1,095,000 = 657,000.00

Feb: 40% of 1,095,000.00 = 438,000.00

60% of 1,070,000 = 702,000.00

Mar: 40% of 1,170,000.00 = 468,000.00

60% of 1,260,000 = 756,000.00

Apr: 40% of 1,260,000.00 = 504,000.00

60% of 1,345,000 = 807,000.00

Other Expenses: 1,140,000.00-540,000.00=600,000.00

Monthly expenses

Details Jan Feb Mar Apr
Salaries & Wages 5,700,000.00/12 475,000.00 475,000.00 475,000.00 475,000.00
Advertisement 300,000.00/12 25,000.00 25,000.00 25,000.00 25,000.00
Warehouse rent 1,200,00.000/12 100,000.00 100,000.00 100,000.00 100,000.00
Insurance 240,000.00/12 20,000.00 20,000.00 20,000.00 20,000.00
Utilities 360,000.00/12 30,000.00 30,000.00 30,000.00 30,000.00
Sales commission 2,561,000.00/12 219,000.00 234,000.00 252,000.00 269,000.00
Other expenses 600,000.00/12 50,000.00 50,000.00 50,000.00 50,000.00

Table 2- Monthly expenses.

Analysis and comments on cash position of the company

Between January and March, the company’s total expenses exceed the receipts, resulting in to a deficit in the cash flow. This deficit seems to be increasing during the three months and to correct this; the company should consider other cheaper sources for the product to cut on the purchasing cost which forms a significant amount of the expenses. It may also consider financing the deficit from its retained earnings, though this should only be considered as a short term solution. The management should find out ways of controlling the expenses which are seems to take a significant amount of the recurrent expenses. However, the company can consider long-term solution such as acquisition of the necessary facilities to facilitate own production. The management should increase the advertisement budget which is expected to boost sales significantly; in turn this should result in to improved gross profit, which is enough to offset the expenses. Salaries, wages and commission seem to contribute to high recurrent expenses; the management should consider revising the remuneration rate. The salaries budget should be reduced significantly since sales are also based on commission. This will greatly help in reduction of the salaries and wages expenses. On its cash management policies, the company should consider prolonging payment of the outstanding bills to its creditors and at the same time should push for payments from it debtors. This will help to improve the company’s cash flow.

Possible impact of acquisition of Factory and machinery on the future cash position of the company and other matters

In April, the company plans to acquire factory and machinery, of which 5% of the cost will be settled on cash. This will further worsen the cash flow which is already in deficit. Acquisition of factory and machinery for own production can be a prudent decision, especially while considering that the market is growing and that the company spends half of its sales receipts on purchasing the products for resale. The company’s plan to acquire a long term loan to finance the acquisition of the factory and machinery is a prudent means of financing a capital project because the interest on debt capital is tax deductible expense (Bettner & Carcello, 2010). As such, the company will reduce its corporate tax burden which impacts adversely on the company’s profits. The decision to manufacture the products on its own is encouraging because the company can produce the products at cheaper prices hence boosting the cash position. On commencement of its own production, the company should also consider selling the excess products to other companies. Improvement of cash flow position will also facilitate repayment of loan which is planned to commence in August.

On acquisition of the factory and machinery, the company can significantly cut on warehouse rent expense since it can adopt JIT system of production where it produces only on order. This will eliminate need of storing readily manufactured products in the warehouse. The company will be able to cushion itself against increase in prices by producing the product on its own unlike when the products are purchased when ready. The company can meet the market demand as it adjusts upwards by increasing production and also it can customize products as per the customers’ requirement. This will strongly boost sales and hence the cash position of the firm. The company’s decision of acquiring the factory and machinery has far reaching effects on profitability since capital expense is tax allowable. On the other hand, the acquired machinery will incur some expenses such as depreciation, utilities and insurance. In addition, the company may be forced to hire high skilled personnel to operate the machinery which may increase the salaries and wages expense.


In summary, it is evident that managers have the responsibilities of ensuring effective cash budget plan. This should be done in consideration with the past budgets as well as understanding of the current demands of the market. Budgets facilitate creation of appropriate value process which in turns helps managers to carry out their managerial functions. It is evident that linking the overall budget to long range and strategic planning enhances the overall planning efforts and attainment of the organizational goals.


Dugdale, D. (1994). Theory and practice: the views of CIMA and students. Management Accounting (UK), September, 5, 56-59.

Horngren, C.T., Datar, S., Foster, G., Rajan, M., &. Ittner, C. (2009). Cost Accounting: A Managerial Emphasis. 13th edition, New Jersey, Upper Saddle River: Prentice Hall.

Libby, T., & Waterhouse, J.H. (1996). Predicting change in management accounting systems. Journal of Management Accounting Research, l (8): 137-154.

Tomkins, C., & Carr, C. (1996). Reflections on the papers in this issue and a commentary on the state of strategic management accounting. Management Accounting Research, 7, 271-80.

Bettner, M., & Carcello, J. (2010). Financial & managerial accounting: The basis for business decisions (15th ed). Boston: McGraw-Hill.

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