Cash Budgeting and Cash Flow Management

Cash Budget

• Cash receipts come from customers, and other sources like investments, sales of assets, and borrowings should be considered
• Cash disbursements require adjustments and additions for accruals, extraneous items, and financial policy requirements
• A minimum cash balance must be maintained, and the cash budget must be altered to accommodate bank loans and their repayment

Budgeted Income Statement and Statement of Financial Position

• Budgeted income statement shows the expected net income during the budget period
• Budgeted statement of financial position is developed by adjusting the current statement for data from other budgets

Budgeting in Service Industries

• Service organizations achieve their budgeted goals by providing services
• The chief executive officer approves the budget and submits it to the board of directors

Master Budget

• A master budget is a comprehensive budget for a specific period, consisting of interrelated operating and financial budgets
• The major steps in developing a master budget include:
  • Establishing basic goals and long-range plans
  • Preparing a sales forecast and estimating costs and operating expenses
  • Determining the effect of budgeted operating results on assets, liabilities, and ownership equity accounts
  • Summarizing estimated data in a projected income statement and cash flow statement

Budgeting and its Role

• Budgeting is the act of preparing a budget
• Budgetary control is the use of budgets to control a firm's activities
• Budget plays an important role in:
  • Allocating resources
  • Coordinating operations
  • Identifying constraints and limitations
  • Communicating expected actions and results
  • Authorizing activities
  • Motivating and guiding implementation
  • Providing controls of operations
  • Managing cash flows
  • Serving as criteria in performance evaluation
• Budget preparation allows managers to:
  • Be forward-looking in evaluating upcoming events and situations
  • Identify potential problems and minimize their adverse effects
  • Identify current and potential bottlenecks in operations
  • Coordinate operations among all budgeted units and synchronize department activities