Analysis of Cash Budget Revision Notes for Grade 12 NSC Matric Accounting

Analysis of Cash Budget

Understanding cash budget analysis

Cash budget analysis is a crucial financial management tool that helps businesses monitor and control their cash flow. Unlike a projected income statement, a cash budget focuses specifically on actual cash movements in and out of the business.

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The key to understanding cash budgets is recognising that they track real money flowing in and out of the business, not just accounting entries or paper transactions.

Key difference between cash budgets and projected income statements

The most important concept to understand is that cash budgets only include items that affect actual cash flow. This means:

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Critical Concept: Cash budgets exclude all non-cash items, no matter how significant they appear in regular accounting statements.

Non-cash items are excluded from cash budgets, such as:
- Depreciation on assets
- Bad debts provisions
- Other accounting adjustments that don't involve actual cash movement
Cash transactions are included, such as:
- Sales receipts from customers
- Operating expense payments
- Interest received on investments
- Loan interest payments

Practical analysis techniques

When analysing cash budgets, you need to master several key calculation methods that are commonly tested in examinations.

Calculating employee costs

For businesses with multiple employees, you often need to determine individual payment amounts:

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Worked Example: Calculating Individual Employee Salaries

Formula: Monthly salary per employee = Total salary expense ÷ Number of employees

Problem: If total hairdressing assistant salaries are R25 500 for 3 employees, what does each employee earn per month?

Solution: R25 500 ÷ 3 = R8 500 per employee per month

Working with percentage increases

When employees receive wage increases, calculate the percentage change using:

$\text{Percentage increase} = \frac{\text{New amount} - \text{Original amount}}{\text{Original amount}} \times 100$

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Worked Example: Calculating Percentage Wage Increase

Problem: If wages increase from R3 400 to R3 672, what is the percentage increase?

Step 1: Calculate the increase

Increase = R3 672 - R3 400 = R272

Step 2: Apply the percentage formula

Percentage = $\frac{R272}{R3400} \times 100 = 8\%$

Interest rate calculations on fixed deposits

Businesses often invest surplus cash in fixed deposits. To find the interest rate:

$\text{Interest rate} = \frac{\text{Annual interest income}}{\text{Fixed deposit amount}} \times 100$

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Worked Example: Determining Fixed Deposit Interest Rate

Problem: A R468 000 fixed deposit earns R3 315 monthly interest. What is the annual interest rate?

Step 1: Calculate annual interest

Annual interest = R3 315 × 12 = R39 780

Step 2: Apply the interest rate formula

Interest rate = $\frac{R39,780}{R468,000} \times 100 = 8.5\%$

Rental cost analysis

For businesses renting premises, you may need to calculate costs per square metre:

$\text{Rental per square metre} = \frac{\text{Total rent}}{\text{Total square metres}}$

If rent is R24 600 for 60 square metres: R24 600 ÷ 60 = R410 per square metre

Variance analysis: comparing actual vs budgeted figures

A critical part of cash budget analysis involves comparing what actually happened with what was planned. This process helps identify areas where the business performed better or worse than expected.

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Variance analysis is not just about finding differences - it's about understanding what those differences mean for the business and whether they indicate good or poor management control.

Steps for effective variance analysis

The systematic approach to variance analysis involves three key steps:

Compare actual with budgeted figures and determine whether the actual figure is higher or lower than budgeted
Evaluate the significance of each variance - decide whether the expense or income item was well controlled or needs attention
Provide meaningful comments that explain:
- The nature of the variance
- Possible reasons for the difference
- Whether this indicates good or poor financial control

Writing effective variance comments

When commenting on variances, your analysis should be specific and business-focused:

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Examples of Effective Variance Comments

For expense variances:

"Telephone costs exceeded budget by R1 950, indicating possible lack of cost control"
"Water and electricity costs were R1 100 below budget, showing effective cost management"

For income variances:

"Fee income exceeded budget by R16 800, demonstrating strong customer demand and business growth"
"Higher consumable store sales indicate increased customer purchases and business popularity"

Internal control and management insights

Cash budget analysis serves an important internal control function. By comparing planned versus actual results, management can:

Identify areas where costs are spiralling out of control
Spot opportunities where income is exceeding expectations
Make informed decisions about future business operations
Adjust future budgets based on actual performance patterns

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Regular variance analysis helps businesses maintain financial discipline and make evidence-based management decisions. This is why many businesses prepare monthly cash budget reports for management review.

Exam tips and techniques

When tackling cash budget analysis questions in examinations, systematic preparation and careful attention to detail are essential for success.

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Key Exam Success Strategies:

Always show your workings - marks are often awarded for method even if the final answer is incorrect
Use the correct formula for percentage and ratio calculations
Be specific in your comments - vague statements like "costs were high" won't earn full marks
Read the question carefully to understand exactly what calculations are required
Double-check your arithmetic - simple calculation errors can cost valuable marks

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Essential Points to Remember:

Cash budgets exclude non-cash items like depreciation and bad debts provisions
Always compare actual results with budgeted figures to identify significant variances
Percentage calculations require you to show the increase/decrease as a proportion of the original amount
Effective variance analysis involves comparing, evaluating, and commenting on differences
Good financial control depends on regular monitoring of actual versus planned performance

Analysis of Cash Budget (Grade 12 NSC Matric Accounting): Revision Notes