Chapter 4.

Cash Budget (Long term and short-term

financial Planning)

1. Core Concepts: The "Why" and "What"

Financial planning involves predicting the future. The most important tool for short-term
planning is the Cash Budget.
 Cash Receipts: Money coming into the business (mostly from customers paying for
sales).
 Cash Disbursements: Money going out of the business (paying for materials, wages,
rent, taxes, etc.).
 Net Cash Flow: The difference between Receipts and Disbursements.
 Credit Sales (Accounts Receivable): You sell a phone today, but the customer pays you
in 30 or 60 days. In a budget, we only record this when the cash actually arrives.
 Read the "Lag": Pay close attention to whether the collection starts in the month of sale
or the month after.
 Lag: This simply means "delay." A "1-month lag" means sales from January are collected
in February.
 Minimum Cash Balance: The "safety net" amount of cash a company wants to keep in
the bank at all times.
 Depreciation is a TRAP: If you see "Depreciation" in a problem (like P4-8 or your
notes), do not include it in the cash budget. It is a non-cash expense.
 Cumulative Cash: The Ending Cash of March becomes the Opening Cash of April.
1. The Cash Receipts Schedule (The "Inflow")
Before you can plan, you need to know how much money is coming in.
 Cash Sales: Money you get immediately.
 Credit Collections: Money you get from customers who bought items 1 or 2 months
ago.
 Total Receipts: The sum of all money entering the company this month.
2. The Cash Disbursements Schedule (The "Outflow")
Now you list everything you have to pay for.
  Purchases: Buying the materials or products you sell. Often, you pay for these with a
delay (e.g., pay 50% now, 50% next month).
 Fixed Outlays: Costs that stay the same every month (Rent, Fixed Salaries).
 Variable Outlays: Costs that change based on sales (Shipping costs, Sales commissions).
 Capital Expenditures: Buying a "big" item, like a new delivery truck or a machine.
 One-time payments: Like buying a $40,000 machine or paying a $15,000 tax bill.
 Minimum Cash Balance: The "emergency fund." The lowest amount of money you are
willing to have in your bank account before you start panicking.
 Financing (Notes Payable): If your balance goes below the minimum, you need to
borrow money from the bank.
 Excess Cash: If you have more than the minimum, you can invest it or save it.

2. The Formats (The "How-To")

To solve these questions, you follow a three-step process.
Step 1: Cash Receipts Schedule
Since most businesses sell on credit (customers pay later), we must calculate when the cash
actually hits the bank.

Item Month 1 Month 2 Month 3

Total Sales (Forecast) (Forecast) (Forecast)

Cash Sales (Immediate %) X X X

Collection (Lag 1 Month %) - Y (from M1) Y (from M2)

Collection (Lag 2 Month %) - - Z (from M1)

Total Cash Receipts Sum Sum Sum

Step 2: Cash Disbursements Schedule

This tracks when you pay your bills (Purchases, Rent, Interest, Taxes, Dividends).
Step 3: The Cash Budget (The Final Summary)
This combines everything to see the final bank balance.
Formula:
 1. Total Receipts - Total Disbursements = Net Cash Flow
2. Net Cash Flow + Beginning Cash = Ending Cash Balance
3. Ending Cash Balance - Minimum Cash Requirement = Excess Cash (or Financing
Needed)
4. 3. The Cash Budget (The "Final Calculation")
5. This is where you combine the two schedules to see if you are "in the red" or "in the
black."

Step Item Formula / Logic

A Total Cash Receipts (From your first schedule)

B (Less) Total Cash (From your second schedule)

Disbursements

C Net Cash Flow A minus B

D (+) Beginning Cash (The cash you had left over from last month)

E Ending Cash Balance C plus D

F (-) Minimum Cash Balance (The "safety" money you want to keep)

G Excess or Financing If positive, you have extra. If negative, you need a

loan.

Practice Question
Scenario: A firm wants to prepare a cash budget for March, April, and May.
 Sales Forecast: Jan: $80,000; Feb: $85,000; March: $90,000; April: $94,000; May:
$100,000.
 Sales Collection: 30% in the month of sale, 50% after 1 month, 15% after 2 months.
 Purchases: 70% of the next month's sales.
 Purchase Payments: 40% paid in the month of purchase, 60% paid the following month.
 Other Expenses: Other operating expenses are $20,000 (Mar), $23,000 (Apr), $25,000
(May).
 Special Items: A loan repayment of $20,000 in March; Dividends of $18,000 in April;
Taxes of $15,000 and Equipment purchase of $40,000 in May.
 Cash on Hand: March 1st balance is $12,000. Minimum required balance is $10,000.
Step 1: Cash Receipts Schedule (The "In")
This calculates exactly when the customers' money hits your bank account.

Source Calculation March April May

Current Month (30%) Sales times 0.30 27,000 28,20 30,000

0

1 Month Lag (50%) Prev. Sales times 0.50 42,500 45,00 47,000
0

2 Month Lag (15%) Sales 2mo ago times 0.15 12,000 12,75 13,500
0

Total Receipts 81,500 85,95 $90,500

0

Step 2: Cash Disbursements Schedule (The "Out")

First, we find the "Purchase" amount, then we see when we pay it.
Working Note for Purchases:
 March Purchase = 70% of April Sales ($94,000) = $65,800
 April Purchase = 70% of May Sales ($100,000) = $70,000
 Note: Feb Purchase (needed for March payment) would have been 70% of March Sales
($90,000) = $63,000.

Disbursement Item March April May

Purchases (40% $26,320 $28,000 $28,000*

Now)

Purchases (60% Lag) $37,800 $39,480 $42,000

Operating Expenses $20,000 $23,000 $25,000

Loan Repayment $20,000 — —

Dividends — $18,000 —

Taxes / Equipment — — $55,000

Total Disbursements $104,120 $108,480 $150,000

Step 3: The Final Cash Budget

This brings it all together to see if you need a loan.

Description March April May

Total Receipts $81,500 $85,950 $90,500

(-) Total Disbursements ($104,120 ($108,480) ($150,000)

)

Net Cash Flow ($22,620) ($22,530) ($59,500)

(+) Opening Cash $12,000 ($10,620) ($33,150)

Ending Cash Balance ($10,620) ($33,150) ($92,650)

(-) Min. Cash Required ($10,000) ($10,000) ($10,000)

Financing Needed $20,620 $43,150 $102,650

Why is this format used?

It helps a manager see a "cash crunch" before it happens. For example, in your handwritten notes
for May, the company has a negative flow of ($30,300). Because of this "Format," the manager
knows in March that they will need to talk to the bank about a loan for May!
Question 1
Actual sales and purchases of December and January, 2024/2025 along with forecast sales and
purchases from February to April 2025 of Black Gold are given below:

Months Sales Purchases

December $50,00 $18,000

0

January $55,00 $20,000

0

February $60,00 $24,000

0

March $70,00 $30,000

0

April $75,00 $32,000

0
The company collects 25 percent of its sales in the month of sales, 40 percent in the subsequent
month, and 25 percent in the second month after the sale, and remaining sales is likely to be bad.
All sales are on credit basis. Payment of purchases is made in the following month after
purchases. General and administrative expenses will amount to $25,000 per month, lease
payment under long term lease contract will be $6,000 per month, depreciation expenses are
$10,000 a month, and miscellaneous expenses will be $9,000 per month. A machine will be
purchased in the month of March at a cost of $28,000. Repayment of Loan will be made in April
$20,000. Cash dividends $15,000 will be made in April. Cash on hand at February 1st is $5,000
and a minimum cash balance of $5,000 should be maintained throughout the cash budget period.
Required: Prepare a monthly cash budget for Black Gold Company from February to April
2025.

Solutions:
Step 1: Cash Receipts Schedule
This table shows when cash from sales is actually collected.

Item February March April

Total Sales $60,000 $70,000 $75,000

Current month (25%) $15,000 $17,500 $18,750

1st Month Lag (40%) $22,000 (from Jan) $24,000 (from $28,000 (from Mar)
Feb)

2nd Month Lag (25%) $12,500 (from Dec) $13,750 (from Jan) $15,000 (from Feb)

Total Cash Receipts $49,500 $55,250 $61,750

Step 2: Cash Disbursements Schedule

Note: Depreciation ($10,000) is a non-cash expense and is NOT included in a cash budget.

Item February March April

Purchase Payments (1 month $20,000 (from $24,000 (from $30,000 (from

lag) Jan) Feb) Mar)

Gen. & Admin Expenses $25,000 $25,000 $25,000

Lease Payment $6,000 $6,000 $6,000

Miscellaneous Expenses $9,000 $9,000 $9,000

 Machine Purchase — $28,000 —

Loan Repayment — — $20,000

Cash Dividends — — $15,000

Total Disbursements $60,000 $92,000 $105,000

Step 3: Final Cash Budget

The ending cash of one month becomes the beginning cash of the next.

Description February March April

Total Cash Receipts $49,500 $55,250 $61,750

Less: Total Disbursements ($60,000) ($92,000) ($105,000)

Net Cash Flow ($10,500) ($36,750) ($43,250)

(+) Opening Cash Balance $5,000 ($5,500) ($42,250)

Ending Cash Balance ($5,500) ($42,250) ($85,500)

(-) Minimum Cash Required ($5,000) ($5,000) ($5,000)

Required Financing $10,500 $47,250 $90,500

More Calculations
Step 1: Cash Receipts Calculations
Cash receipts are based on the collection rule: 25% in the month of sale, 40% the next month,
and 25% two months later.
February Receipts
 Current month (25% of Feb Sales): 0.25 times 60,000 = 15,000
 1st Month Lag (40% of Jan Sales): 0.40 times 55,000 = 22,000
 2nd Month Lag (25% of Dec Sales): 0.25 times 50,000 = 12,500
 Total February Receipts: 15,000 + 22,000 + 12,500 = 49,500.
March Receipts
  Current month (25% of Mar Sales):0.25 times 70,000 = 17,500.
 1st Month Lag (40% of Feb Sales): 0.40 times 60,000 = 24,000.
 2nd Month Lag (25% of Jan Sales): 0.25 times 55,000 = 13,750
 Total March Receipts: 17,500 + 24,000 + 13,750 = 55,250.
April Receipts
 Current month (25% of Apr Sales): 0.25 times75,000 = 18,750.
 1st Month Lag (40% of Mar Sales): 0.40 times 70,000 = 28,000.
 2nd Month Lag (25% of Feb Sales): 0.25 times 60,000 = 15,000.
 Total April Receipts: 18,750 + 28,000 + 15,000 = 61,750.
Step 2: Cash Disbursements Calculations
Disbursements follow the rule: Purchases are paid in the following month. All other expenses
are paid in the month they occur.
February Disbursements
 Purchases (from Jan): 20,000.
 General & Admin: 25,000.
 Lease Payment: 6,000.
 Miscellaneous: 9,000.
 Total Feb Disbursements: 20,000 + 25,000 + 6,000 + 9,000 = 60,000
March Disbursements
 Purchases (from Feb): 24,000.
 General & Admin, Lease, Misc: 25,000 + 6,000 + 9,000 = 40,000.
 Machine Purchase: 28,000.
 Total Mar Disbursements: 24,000 + 40,000 + 28,000 = 92,000.
April Disbursements
 Purchases (from Mar): 30,000.
 General & Admin, Lease, Misc: 40,000.
 Loan Repayment: 20,000.
  Cash Dividend: 15,000.
 Total Apr Disbursements: 30,000 + 40,000 + 20,000 + 15,000 = 105,000.
Step 3: Final Cash Budget & Financing
This step calculates the "Cash Chain" where the ending of one month becomes the beginning of
the next.
February Final
 Net Cash Flow: 49,500 Receipts - 60,000 Disbursements = 10,500
 Ending Balance:10,500 Flow + 5,000 Opening = -5,500.
 Financing Needed: To get from -5,500 up to the +5,000 minimum, you need: 5,000
- (-5,500) = 10,500.
March Final
 Net Cash Flow: 55,250 - 92,000 = -36,750.
 Opening Cash: (From Feb End) = -5,500.
 Ending Balance: -36,750 + (-5,500) = -42,250.
 Financing Needed: To get from -42,250$ to +5,000, you need: $\$5,000 - (-42,250) =
47,250.
April Final
 Net Cash Flow: 61,750 - 105,000 = -43,250.
 Opening Cash: (From Mar End) = -42,250.
 Ending Balance: -43,250 + (-42,250) = -85,500.
 Financing Needed: To get from -85,500$ to +5,000$, you need: $\$5,000 - (-85,500) =
90,500.
Question 2
Forecast sales and purchases from July to August 2025 of Fine Glass Ltd. are given below:

Months Sales Purchases

July $44,000 $24,000

August $55,000 $30,000

September $62,000 $38,000

All sales are on credit basis and the company typically collects 30 percent of its sales in the
month of sales, 50 percent in the subsequent month, and 20 percent in the second month after the
sales. Total accounts receivable on July 1st are $37,400, which includes A/R of May sales $8,000
and June sales A/R $29,400. Payment of purchases is made in the following month after
purchases. Accounts payable on July 1st on account of June purchases are $18,000. General and
admin expenses will amount to $10000 each month, lease payment under long term lease
contract will be $4000 each month, depreciation expenses are $5000 each month, and
miscellaneous expenses will be $5000 each month. A machine will be purchased in the month of
August at a cost of $20000. Cash dividends of $25000 will be paid in July. Repayment of loan
$15000 will be made in September. Cash on hand at July 1st is $13000 and a minimum cash
balance of $10000 should be maintained throughout the cash budget period.
Required:
a) Prepare a monthly cash budget of Fine Glass Ltd. from July to September 2025, also show
total quarterly results.

Method 1: Separate Calculations (Step-by-Step)

1. Cash Receipts Calculations
Rule: 30% Current Month, 50% 1st Month Lag, 20% 2nd Month Lag.
 July Receipts:
o From July Sales (30%): 0.30 times 44,000 = 13,200

o From June Sales (50%): Given in A/R as 29,400

o From May Sales (20%): Given in A/R as 8,000

o Total: 13,200 + 29,400 + 8,000 = 50,600

 August Receipts:
o From August Sales (30%): 0.30 times 55,000 = 16,500

o From July Sales (50%): 0.50 times 44,000 = 22,000

o From June Sales (20%): (Note: June sales was 29,400/ 0.70 * 0.20 = 8,400)

The Logic Step-by-Step

1. Understand the Collection Rule
According to the problem, sales are collected as follows:
 30% in the month of sale.
  50% one month after (Subsequent month).
 20% two months after.
2. Identify what is "Left Over" from June
By July 1st, June's sales have already had their first collection (the 30% collected
in June itself). This means 70% (50% + 20%) of June sales are still waiting to be
collected.
3. Find the Total June Sales
The problem states that June's portion of the Accounts Receivable is $29,400.
Since we know this $29,400$ represents the remaining 70% of June sales, we use
this formula:
Total June Sales = 29,400/0.70 =42,000
4. Calculate the August Collection (The "2-Month Lag")
Now that we know the total June sales were 42,000, we look at when the final
20% is collected. For June sales, the 2-month lag hits in August.
August Collection from June = 42,000 *0.20 = 8,400
o Total: 16,500 + 22,000 + 8,400 = 46,900

 September Receipts:
o From Sept Sales (30%): 0.30 times 62,000 = 18,600

o From August Sales (50%): 0.50 times 55,000 = 27,500

o From July Sales (20%): 0.20 times 44,000 = 8,800

o Total: 18,600 + 27,500 + 8,800 = 54,900

2. Cash Disbursements Calculations

Rule: Pay purchases 1 month later. Ignore Depreciation ($5,000) as it is non-cash.
 July Payments: 18,000 (June Purchase) + 10,000 (G\A)} + 4,000 (Lease) + 5,000 (Misc)
+ 25,000 (Dividend)} = 2,000
 August Payments: 24,000 (July Purchase)} + 19,000 (Fixed Exp)} + 20,000 (Machine)}
= 63,000}
 September Payments: 30,000 (Aug Purchase)} + 19,000 (Fixed Exp)} + 15,000 (Loan)}
= 64,000}
Method 2: Form of Tables
Cash Receipts Schedule

Item July August September Total Quarter

Total Sales $44,000 $55,000 $62,000 $161,000

Current Month $13,200 $16,500 $18,600 $48,300

(30%)

1 Month Lag (50%) $29,400 $22,000 $27,500 $78,900

2 Month Lag (20%) $8,000 $8,400 $8,800 $25,200

Total Receipts $50,600 $46,900 $54,900 $152,400

Monthly Cash Budget

Description July August September Total Quarter

Total Cash Receipts $50,600 $46,900 $54,900 $152,400

Less: Total ($62,000) ($63,000 ($64,000) ($189,000)

Disbursements )

Net Cash Flow ($11,400) ($16,100 ($9,100) ($36,600)

)

(+) Opening Cash $13,000 $1,600 ($14,500) $13,000

Ending Cash Balance $1,600 ($14,500 ($23,600) ($23,600)

)

(-) Min. Cash Required ($10,000) ($10,000 ($10,000) ($10,000)

)

Required Financing $8,400 $24,500 $33,600 $33,600