Budgeting (Grade 10 NSC Matric Accounting): Revision Notes
📚Revision Notes
Cash budget
What is a cash budget?
A cash budget is a financial planning tool that tracks the anticipated movement of money in and out of a business. It helps business owners predict their bank balance over a specific period, usually a year, although it can be prepared monthly as well.
The cash budget is essential because it shows whether a business will have enough money available when needed. This forward planning allows managers to identify potential cash shortages before they happen and arrange financing if necessary.
Note
The primary purpose of a cash budget is forecasting - it helps you look ahead and prepare for both opportunities and challenges in your business's cash position.
Why is cash flow planning important?
Understanding your cash position throughout the year is crucial for business survival. Different months have different cash patterns. For example, December is typically a high-turnover month because customers spend more money during the festive season. However, January often sees poor cash flow because customers have less money to spend after the December holidays.
A well-prepared cash budget helps businesses:
- Plan for months with low cash flow by setting aside funds from high-turnover months
- Avoid cash shortages that could prevent paying suppliers or staff
- Identify opportunities to invest surplus cash
- Arrange loans or overdrafts in advance if needed
- Make informed decisions about major purchases or investments
Note
Seasonal Variations Matter
Cash flow patterns often follow predictable seasonal trends. By analyzing previous years' data, businesses can anticipate these fluctuations and plan accordingly. This is why comparing budgeted figures with actual results is so valuable for future planning.
The three sections of a cash budget
Every cash budget consists of three main sections that work together to show the complete cash picture of the business.
Section 1: Cash receipts (cash income)
This section records all money coming into the business during a specific period. Cash receipts represent the actual cash the business receives, not just sales made on credit.
Common items in cash receipts:
- Cash sales - money received immediately when goods are sold
- Collections from debtors - payments received from customers who bought on credit
- Interest received - earnings from investments such as fixed deposits and bank accounts
- Loan proceeds - money received when the business takes out a loan
- Fixed deposits that mature - investment money that becomes available when the deposit period ends
- Proceeds from asset sales - cash received when selling fixed assets like vehicles or equipment
- Rent income - money received from renting out property
- Bad debts recovered - money collected from debts previously written off
Note
Timing is Everything
Notice that cash receipts include collections from debtors, not just sales. This is because credit sales only become cash when the customer actually pays. A business might make a sale in January, but only receive the cash in February or March when the debtor settles their account.
Section 2: Cash payments (cash outflow)
This section tracks all money leaving the business during the period. These are actual payments made, not just expenses incurred.
Common items in cash payments:
- Cash purchases - immediate payment for merchandise or trading stock
- Payments to creditors - settling amounts owed to suppliers
- Loan repayments - paying back borrowed money
- Interest on loans and overdrafts - the cost of borrowing money
- Fixed deposits made - money invested in savings products
- Fixed asset purchases - buying equipment, vehicles, or property
- Operating expenses - salaries, wages, telephone, electricity, motor vehicle expenses
- Employer contributions - medical aid, pension, UIF payments
- Other business expenses - office maintenance, uniforms, bank charges
Note
Cash vs Accrual Accounting
Remember that cash budgets show when money is actually paid, not when the expense is incurred. For example, if you receive an electricity bill in January but only pay it in February, it appears in your February cash budget, not January.
Section 3: Cash balance
This section calculates the estimated bank position at the end of each month. It shows whether the business has a surplus or faces a deficit.
The calculation follows this pattern:
-
Calculate surplus or deficit for the month:
- Cash receipts minus Cash payments = Surplus/(Deficit)
-
Add the opening balance:
- Bank balance at the beginning of the month
-
Determine closing balance:
- Opening balance + Surplus (or - Deficit) = Closing balance
The closing balance of one month becomes the opening balance for the next month. A negative balance indicates an overdraft situation, which should be shown in brackets.
Items that do NOT appear in a cash budget
It's crucial to understand that cash budgets only include transactions involving actual cash movement. Several accounting items that appear in financial statements do not involve cash and therefore are excluded from cash budgets.
Important
Critical Rule: Only Real Cash Transactions
If no money actually changes hands, the item does NOT belong in a cash budget. This is one of the most important concepts to understand and a common exam question.
Items excluded from cash budgets:
- Discount allowed - a reduction given to customers who pay early (this reduces the amount of cash received but isn't a separate cash transaction)
- Discount received - a reduction received from suppliers for early payment (this reduces cash paid but isn't separate)
- Bad debts - amounts written off as uncollectable (no cash is involved in writing off the debt)
- Depreciation - the decrease in value of fixed assets (this is a paper entry, not a cash transaction)
- Profit on sale of asset - only the actual cash received from the sale appears in the budget
- Loss on sale of asset - again, only the actual cash received is recorded
Note
Exception: Bad Debts Recovered
While bad debts themselves don't appear in the cash budget, bad debts recovered (when previously written-off debts are actually collected) DO appear because cash is received. This is a subtle but important distinction.
Format of a cash budget
A cash budget is typically presented in a columnar format showing multiple time periods (usually months) side by side. This layout makes it easy to compare different periods and identify patterns.
Standard cash budget structure:
| Description | January | February | March | Total |
|---|---|---|---|---|
| CASH RECEIPTS | ||||
| Cash sales | xxx | xxx | xxx | xxx |
| Collections from debtors | xxx | xxx | xxx | xxx |
| Interest on fixed deposit | xxx | xxx | xxx | xxx |
| Other receipts | xxx | xxx | xxx | xxx |
| TOTAL RECEIPTS | xxx | xxx | xxx | xxx |
| CASH PAYMENTS | ||||
| Cash purchases | xxx | xxx | xxx | xxx |
| Payments to creditors | xxx | xxx | xxx | xxx |
| Equipment purchases | xxx | xxx | xxx | xxx |
| Operating expenses | xxx | xxx | xxx | xxx |
| TOTAL PAYMENTS | xxx | xxx | xxx | xxx |
| Cash surplus/(deficit) | xxx | xxx | xxx | xxx |
| Bank opening balance | xxx | xxx | xxx | xxx |
| Bank closing balance | xxx | xxx | xxx | xxx |
The "Total" column shows the cumulative figures for the entire budget period.
Note
Reading the Format
Notice how the structure clearly separates receipts, payments, and balance calculations. This three-part structure is standard across all cash budgets, making them easy to read once you understand the format.
Worked example: ABC Cleaning Services
Let's examine a practical example to understand how cash budgets work in real business situations.
Example
Worked Example: ABC Cleaning Services Cash Budget Analysis
Background: ABC Cleaning Services hires out cleaning services to clients at R70 per hour. The owner, Betty Blue, ensures all cleaners work consistent hours throughout the year and are paid weekly based on hours worked. The business has a manager, Alfred Green, who handles day-to-day operations.
Cash budget extract for 2006 and 2007:
| Item | 2006 Budget | 2006 Actual | 2007 Budget |
|---|---|---|---|
| RECEIPTS | |||
| Fee income from cleaning services | R721,000 | R721,000 | R860,240 |
| Rent income | R12,000 | R12,000 | R14,400 |
| Interest on fixed deposit | R5,000 | R4,000 | R4,500 |
| Loan from Blue Bulls Bank | R50,000 | R50,000 | R20,000 |
| TOTAL RECEIPTS | R788,000 | R787,000 | R899,140 |
| PAYMENTS | |||
| Salary of office worker | R54,000 | R54,000 | R60,000 |
| Salary of Manager | R150,000 | R170,000 | R225,000 |
| Wages of 8 cleaners | R206,000 | R206,000 | R210,000 |
| Employer's contribution | R50,156 | R50,156 | R62,000 |
| Office telephone & electricity | R20,000 | R16,500 | R20,000 |
| Motor vehicle expenses | R36,000 | R34,000 | R38,000 |
| Interest on loan | R7,500 | R7,500 | R10,500 |
| Bank charges | R15,000 | R19,000 | R20,000 |
| Uniforms for cleaners | R6,400 | R7,200 | R3,200 |
| Office maintenance costs | R17,000 | R13,000 | R13,000 |
| Drawings by Bettie Blue | R154,000 | R204,000 | R250,000 |
| Purchase of new vehicle | - | - | R420,000 |
| TOTAL PAYMENTS | R716,056 | R781,356 | R1,331,700 |
| Cash surplus/(deficit) | R72,044 | R5,644 | (R531,600) |
| Bank opening balance | R160,075 | R232,119 | R237,763 |
| Bank closing balance | R232,119 | R237,763 | (R293,837) |
Key observations from this example:
-
Variance analysis: The 2006 actual figures show some items differed from the budget. The manager's salary was higher than budgeted (R170,000 vs R150,000), which indicates a budget control issue.
-
Income growth: Fee income increased from R721,000 (2006) to R860,240 (2007), showing business growth.
-
Major purchase impact: The 2007 budget shows a vehicle purchase of R420,000, which significantly impacts cash flow.
-
Cash deficit situation: The 2007 budget predicts a cash deficit of R531,600 for the year. Combined with the opening balance of R237,763, this results in an estimated bank overdraft of R293,837 by year-end (shown in brackets).
-
Drawings concern: Betty Blue's drawings increased substantially from R154,000 (budgeted in 2006) to R250,000 (budgeted in 2007). This represents a significant cash outflow that contributes to the deficit.
-
Financing implications: The business took a R50,000 loan in 2006 but only budgets for R20,000 in 2007. Given the projected deficit, additional financing arrangements may be necessary.
Tips for working with cash budgets
Understanding how to work with cash budgets effectively requires attention to detail and awareness of common pitfalls.
Note
Exam Hints:
- Always check whether amounts are shown in brackets - these indicate negative figures (deficits or overdrafts)
- Remember that closing balance of one period = opening balance of next period
- Don't include non-cash items like depreciation or bad debts (unless it's "bad debts recovered")
- Show calculations clearly to earn method marks
- Watch for items that affect timing (e.g., interest received at year-end only)
Important
Common Mistakes to Avoid:
- Including discount allowed or discount received
- Confusing sales figures with actual cash received
- Forgetting to account for credit sales timing (debtors collect later)
- Not recognizing that depreciation is excluded
- Misreading brackets as positive numbers
These mistakes cost students valuable marks in exams. Make sure you understand the cash versus accrual distinction clearly.
Summary
Key Points to Remember:
-
A cash budget tracks actual money movement in and out of the business, helping predict bank balances over time.
-
Cash budgets have three main sections: cash receipts (money in), cash payments (money out), and cash balance (resulting bank position).
-
Non-cash items are excluded from cash budgets: depreciation, bad debts, discounts allowed/received, and profit/loss on asset sales don't appear because no cash changes hands.
-
The cash balance calculation follows this pattern: Opening balance + Surplus (or - Deficit) = Closing balance. Each month's closing balance becomes the next month's opening balance.
-
Cash budgets are essential for planning and control, helping businesses identify potential shortages in advance, manage seasonal variations, and make informed decisions about investments and financing needs.