Cash Budget¶

Question 1Question 2Question 3

Question¶

Saurashtra Co. Ltd. - Projected Cash Flows and Sales Data (2019)¶

Month	Sales (Rs.)	Purchases (Rs.)	Wages (Rs.)	Manufacturing Expenses (Rs.)	Office Expenses (Rs.)	Selling Expenses (Rs.)
June	180,000	124,800	12,000	3,000	2,000	2,000
July	192,000	144,000	14,000	4,000	1,000	4,000
August	108,000	243,000	11,000	3,000	1,500	2,000
September	174,000	246,000	12,000	4,500	2,000	5,000
October	126,000	268,000	15,000	5,000	2,500	4,000
November	140,000	280,000	17,000	5,500	3,000	4,500
December	160,000	300,000	18,000	6,000	3,000	5,000

Additional Information: - Cash on hand as of August 1, 2019: Rs. 25,000. - Sales Collection: 50% in the month following the sale, 50% in the second month following. - Purchases Payment: Creditors are paid in the month following the purchase. - Manufacturing Expenses Payment: Half a month delay. - Office and Selling Expenses Payment: One month delay.

Answer¶

Cash Budget Table for Saurashtra Co. Ltd. (August - October 2019)¶

Particulars	August (Rs.)	September (Rs.)	October (Rs.)
Opening Balance	25,000	44,500	(66,750)
Receipts:
- Sales Collection	186,000	150,000	141,000
Total Receipts	211,000	194,500	74,250
Payments:
- Purchases	144,000	243,000	246,000
- Wages	14,000	11,000	12,000
- Manufacturing Expenses	3,500	3,750	4,750
- Office Expenses	1,000	1,500	2,000
- Selling Expenses	4,000	2,000	5,000
Total Payments	166,500	261,250	269,750
Closing Balance	44,500	(66,750)	(195,500)

Explanation¶

August:
Opening Balance: Rs. 25,000
Total Receipts (Sales Collection from June and July): Rs. 186,000
Total Payments (including all expenses): Rs. 166,500
Closing Balance: Rs. 44,500
September:
Opening Balance: Rs. 44,500
Total Receipts (Sales Collection from July and August): Rs. 150,000
Total Payments (including all expenses): Rs. 261,250
Closing Balance: Rs. (66,750)
October:
Opening Balance: Rs. (66,750)
Total Receipts (Sales Collection from August and September): Rs. 141,000
Total Payments (including all expenses): Rs. 269,750
Closing Balance: Rs. (195,500)

Insights¶

The cash budget indicates the need for managing cash flow effectively, especially considering the significant expenses and payment lags. The closing balance becomes negative in September and worsens in October, indicating a potential need for overdraft facilities or better cash management strategies to handle the operational costs and payment schedules. This budget also underlines the importance of strategic financial planning to mitigate the cash shortfalls forecasted for the later months.

Question¶

S.K. Brothers - Cash Budget Requirement Details (2019)¶

Background: S.K. Brothers are engaging in production mostly for stock from October to December 2019. The firm seeks to secure a temporary overdraft facility for this period due to expected cash flow issues.

Month	Sales (Rs.)	Purchases (Rs.)	Wages (Rs.)
August	360,000	249,600	24,000
September	384,000	288,000	28,000
October	216,000	486,000	22,000
November	348,000	492,000	20,000
December	252,000	536,000	30,000

Additional Terms: - Sales Collection: 50% in the month following the sale, 50% in the second month following. - Payments to Creditors: Creditors are paid in the month following the purchase. - Estimated Cash as of October 1, 2019: Rs.50,000.

Answer - Cash Budget from October to December 2019¶

Particulars	October 2019 (Rs.)	November 2019 (Rs.)	December 2019 (Rs.)
Opening Balance	50,000	112,000	(94,000)
Receipts from Sales:
- Collection from Debtors	372,000	300,000	282,000
Total Receipts (A)	422,000	412,000	188,000
Payments:
- To Creditors	288,000	486,000	492,000
- Wages	22,000	20,000	30,000
Total Payments (B)	310,000	506,000	522,000
Closing Balance (A-B)	112,000	(94,000)	(334,000)

Working Notes¶

Payments to Debtors

Particulars	October (Rs.)	November (Rs.)	December (Rs.)
August	180,000
September	192,000	192,000
October		108,000	108,000
November			174,000
Total	372,000	300,000	282,000

Explanation and Insights¶

October 2019: Starts with an opening balance of Rs. 50,000. Collections from previous sales and payments for current expenses lead to a positive closing balance of Rs. 112,000.
November 2019: Despite starting with a positive balance from October, the company faces a higher outflow due to payments to creditors, resulting in a negative closing balance of Rs. 94,000.
December 2019: The trend of negative cash flow continues due to further high creditor payments compared to collections from sales, extending the overdraft to Rs. 334,000 by the end of December.

Cash Budget Setup for Tata Co. Ltd.¶

Given Data:¶

Prime cost per unit: Rs. 40 (Materials Rs. 16, Labour Rs. 24)
Variable expenses per unit: Rs. 8
Fixed expenses per month: Rs. 30,000
Selling price per unit: Rs. 80
Monthly production and sales units:
January: 900
February: 1200
March: 1800
April: 2000
May: 2100
June: 2400
Payment Terms:
Materials: Paid in the month following purchase.
Labour and Variable Expenses: Paid in the month incurred.
One-third of sales are cash, two-thirds are credit paid the following month.

Cash Budget Table¶

Calculation for Sales and Costs¶

Cash Sales and Collections from Debtors:
Cash Sales: 1/3 of total sales per month.
Credit Sales Collection: 2/3 from the previous month.
Materials Payment:
Payment for materials used in production is made in the month following purchase.
Other Expenses (Labour, Variable, Fixed):
Paid in the month they are incurred.

Budget Table (January - June 2019)¶

Month	Cash Sales (Rs.)	Credit Sales Collection (Rs.)	Materials Cost (Rs.)	Labour Cost (Rs.)	Variable Expenses (Rs.)	Fixed Expenses (Rs.)	Total Receipts (A)	Total Payments (B)	Closing Balance
Jan	24,000	0	0	21,600	7,200	30,000	24,000	58,800	-34,800
Feb	32,000	16,000	14,400	28,800	9,600	30,000	48,000	82,800	-37,600
Mar	48,000	25,600	19,200	43,200	14,400	30,000	73,600	106,800	-32,400
Apr	53,333	48,000	28,800	48,000	16,000	30,000	101,333	122,800	-5,867
May	56,000	53,333	32,000	50,400	16,800	30,000	109,333	129,200	-27,600
June	64,000	56,000	33,600	57,600	19,200	30,000	120,000	140,400	8,000

Explanation and Insights¶

Cash Flow: The cash budget reflects a challenging initial few months with negative closing balances, which improve as sales volume increases and credit sales from previous months are collected. The company may need an overdraft or additional financing for initial months until it stabilizes with positive cash flows in June.
Expenses Timing: Materials costs reflect the purchase for the subsequent month's production, showing a lag which impacts cash flow.
Credit Management: Efficient management of credit sales and timely collection is crucial as it forms a significant portion of the revenue and impacts cash flow directly.

This budget will help Tata Co. Ltd. in planning their finances, anticipating cash shortfalls, and arranging necessary funds or credit facilities in advance to ensure smooth operations and growth during the initial months of production.

=== "Question 4" ## Question Information in Tabular Format

**Data for Cash Budget Preparation:**

| Month       | Sales (Rs.) | Raw Materials (Rs.) |
|-------------|-------------|---------------------|
| May         | 75,000      | 37,500              |
| June        | 75,000      | 37,500              |
| July        | 1,50,000    | 52,500              |
| August      | 2,25,000    | 3,67,500            |
| September   | 3,00,000    | 1,27,500            |
| October     | 1,50,000    | 97,500              |
| November    | 1,50,000    | 67,500              |
| December    | 1,37,500    | -                   |

**Additional Cash Flow Details:**

- Collection Estimates:
  - Within the month of sale: 5%
  - During the month following the sale: 80%
  - During the second month following the sale: 15%
- Payment for raw materials is made in the next month.
- Monthly Expenses:
  - Salary: Rs. 11,250
  - Lease Payment: Rs. 3,750
  - Miscellaneous Expenses: Rs. 1,150
  - Depreciation: Rs. 15,000 (non-cash, not considered in cash budget)
- Income Tax Payment: Rs. 26,250 each in September and December.
- Research Payment: Rs. 75,000 in October.
- Opening Balance on 1st July: Rs. 55,000.

### Answer -  Cash Budget from July to December

| Particulars           | July       | Aug.       | Sep.        | Oct.       | Nov.       | Dec.      |
|-----------------------|------------|------------|-------------|------------|------------|-----------|
| **Receipts**          |            |            |             |            |            |           |
| Opening Balance       | 55,000     | 80,100     | 1,53,950    | -38,450    | 24,150     | 83,000    |
| Collection from Debtors | 78,750   | 1,42,500   | 2,17,500    | 2,81,250   | 1,725,00   | 1,49,375  |
| **Total Receipts (A)**| 1,33,750   | 2,22,600   | 3,71,450    | 2,42,800   | 1,96,650   | 2,32,375  |
|                       |            |            |             |            |            |           |
| **Payments**          |            |            |             |            |            |           |
| Payment to suppliers  | 37,500     | 52,500     | 3,67,500    | 1,27,500   | 97,500     | 67,500    |
| Salary                | 11,250     | 11,250     | 11,250      | 11,250     | 11,250     | 11,250    |
| Lease payment         | 3,750      | 3,750      | 3,750       | 3,750      | 3,750      | 3,750     |
| Misc. expense         | 1,150      | 1,150      | 1,150       | 1,150      | 1,150      | 1,150     |
| Income tax            | -          | -          | 26,250      | -          | -          | 26,250    |
| Payment for Research  | -          | -          | -           | 75,000     | -          | -         |
| **Total Payment (B)** | 53,650     | 68,650     | 4,09,900    | 2,18,650   | 1,13,650   | 1,09,900  |
|                       |            |            |             |            |            |           |
| **Closing Balance**   | 80,100     | 1,53,950   | -38,450     | 24,150     | 83,000     | 1,22,475  |

### Explanation:

- The cash budget table starts with an opening balance in July of Rs. 55,000.
- Receipts each month include the collection from debtors as per the sales made in previous months.
- Total receipts are the sum of the opening balance and collections.
- Payments each month include payments to suppliers for raw materials purchased in the previous month, as well as monthly salary, lease, miscellaneous expenses, and other specified expenses like income tax and research.
- Total payments are the sum of all the payments made in the month.
- The closing balance for each month is the total receipts minus the total payments. This balance is carried forward as the opening balance for the next month.
- In September and October, there are significant payments (including income tax and research payments), which result in a negative closing balance in September.
- The closing balance improves by December, ending with a positive balance of Rs. 1,22,475.

This budget helps in understanding the cash flow needs of the company and planning for sufficient liquidity to cover expenses and obligations throughout the six-month period. It also indicates when the company may need to arrange for additional financing to cover shortfalls.

=== "Question 5" ## Question Information in Tabular Format

**Data for Cash Budget Preparation:**

| Months       | Sales (Rs.) | Purchases (Rs.) | Wages (Rs.) | Expenses (Rs.) |
|--------------|-------------|-----------------|-------------|----------------|
| Jan. (Actual) | 80,000     | 45,000          | 20,000      | 5,000          |
| Feb. (Actual) | 80,000     | 40,000          | 18,000      | 6,000          |
| March (Actual)| 75,000     | 42,000          | 22,000      | 6,000          |
| April (Budget)| 90,000     | 50,000          | 24,000      | 7,000          |
| May (Budget)  | 85,000     | 45,000          | 20,000      | 6,000          |
| June (Budget) | 80,000     | 35,000          | 18,000      | 5,000          |

**Additional Cash Flow Details:**

- 10% of purchases and 20% of sales are for cash.
- The average collection period is 1/2 month; credit purchases are paid after one month.
- Wages are paid half monthly; rent of Rs. 500 included in expenses is paid monthly, and other expenses are paid after a one-month lag.
- The cash balance on April 1, 2019, is Rs. 15,000.

### Answer -  Cash Budget from April to June 2019

**Cash Budget for R.M.C. LTD.:**

| Particulars           | April (Rs.) | May (Rs.)  | June (Rs.) |
|-----------------------|-------------|------------|------------|
| **Receipts**          |             |            |            |
| Opening Balance       | 15,000      | 27,200     | 35,700     |
| Cash Sales (20% of Sales) | 18,000  | 17,000     | 16,000     |
| Collection from Debtors | 66,000    | 70,000     | 66,000     |
| **Total Receipts (A)**| 99,000      | 114,200    | 117,700    |
| **Payments**          |             |            |            |
| Cash Purchases (10% of Purchases) | 5,000 | 4,500  | 3,500     |
| Payment to Creditors (Previous Month Purchases) | 37,800 | 45,000 | 40,500 |
| Wages (Paid Half Monthly) | 23,000  | 22,000     | 19,000     |
| Rent                  | 500         | 500        | 500        |
| Other Expenses (Previous Month Expenses) | 5,500 | 6,500  | 5,500  |
| **Total Payments (B)**| 71,800      | 78,500     | 69,000     |
| **Closing Balance**   | 27,200      | 35,700     | 48,700     |

### Explanation of the Cash Budget Table:

- The **Opening Balance** for April starts with Rs. 15,000.
- **Total Receipts** are the sum of cash sales (20% of total sales), and collections from debtors, which is 80% of last month's sales.
- **Total Payments** are the combination of cash purchases (10% of total purchases), payments to creditors for the previous month's purchases, half-monthly wages, monthly rent, and other expenses from the previous month.
- The **Closing Balance** for each month is calculated by subtracting total payments from the total receipts and then adding the previous month's closing balance. This balance is then carried forward as the opening balance for the next month.
- The cash budget indicates that R.M.C. LTD. maintains a positive cash balance throughout these months, with an increasing trend, suggesting healthy cash flow management.

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