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What is Cash budget and its type of methods?



Cash Budget: It is a financial budget which estimates cash receipt and payment for fixed period in future. It acts as a tool to forecast the cash requirement in future and with the help of it company can fulfil its cash requirements.

Methods of cash budget: There are three methods with the help of which company can prepare its cash budget and the methods are:
  • Receipt and Payment method
  • Adjusted Profit and loss method
  • Balance Sheet method
1.      Receipt and Payment method: Under this method all cash receipts and payments are forecast and then, all cash payments are subtracted from all cash receipts of budget period. It is prepared to forecast short term cash requirement. Accruals and adjustments are excluded in this method and also the non-cash items which do not affect the cash flow like depreciation, outstanding expenses. It is uses to control and plan the cash needs over fixed period. Excess of cash receipts are shown as closing balance of cash and if payments are more than it is treated as overdraft. The closing balance is the opening balance of next month and in the same way the negative closing balance is treated but if the company arranged the loan for that overdraft then the next month opening balance will be zero.

Format of Cash Budget for 3 month (receipt and payment method):

Particulars
1st month
2nd month
3rd month
Opening balance
Add: Receipts:
Cash sales
Cash from debtors and B/R
Cash receive for issue of shares
Cash receive on rent, dividend, premium
Loan  received
Cash from sale on fixed asset
Total (A)
Less: Payments
Cash purchase
Trade creditors
Salaries and wages
Capital expenditure
Loan payment
Interest, dividend payment
Taxes
Total (B)
Closing Balance (A-B)

2.     Adjusted Profit and loss method: Under this method all accrual and non- cash items are included and it is prepared to ascertain the long term cash requirement. It is also known as cash flow statement. It is based on the assumption that profit is equivalent to cash.

Format of Cash Budget as the end of year 2016 (Adjusted Profit & Loss A/c)

Particulars
Amount (Rs.)
Amount (Rs.)
Opening cash balance
Add: Net Profit (Profit & Loss a/c)
Provision & Reserves
Depreciation
Outstanding expenses
Decreases current assets
Increases current liabilities
Loss on sale of fixed assets
Cash receipt from sale of Machinery, Investment etc.
Issue of share capital
Total (A)
-------
--------
Less: Profit on sale of fixed asset
Capital payments
Dividend payments
Decreases current liabilities
Increases current assets
Total (B)
-----
------
Closing balance (A-B)
-------------
------------

3.     Balance Sheet method: Under this method all assets are written in right side and all liabilities written in left side same as balance sheet prepared in final year but cash is not included in that sheet. If liabilities are more than assets then the difference is written in asset side as cash at bank but if the assets are more than liabilities then in that case difference is written in liabilities side as overdraft. It included all adjustments and non – cash item to ascertain the cash requirement. 

Format of Cash Budget as on 31 December 2016 (balance sheet method):

Liabilities
Amount (Rs.)
Assets
Amount (Rs.)
Equity share capital
Land & Building
Reserves
Plant & Machinery
Profit and loss a/c
Long term investment
Debentures
Accumulated amortisation
Long term loan
Closing stock
Creditors and Bills payable
Prepaid income
Accumulated depreciation
Debtors and B/R
Outstanding expenses
Cash at bank
Total
----------
Total
-----------


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