A cash budget is defined as a document that sets out the estimated cash receipts and payments for a future period. Cash budgets are an essential management tool for an organisation to predict liquidity. It is also used as a control tool to manage the payment of debts within the specified timeframes. Therefore, a reliable cash flow is essential to the organisation's survival.
Enhance your understanding by watching the following 20-minute video, in this case, from South Africa.
A cash budget will only incorporate those items that involve the actual flow of cash, e.g. receipts and payments. However, it is not restricted to revenue and expense items as it can also include capital items such as the purchase and sale of assets, payment of dividends, drawings and repayment of loans. Any items that do not involve a flow of cash are excluded, e.g. depreciation, provision for doubtful debts, bad debts, gains or losses on the sale of non-current assets.1
There are four (4) distinct areas of a cash budget:
- Opening balance
- Receipts
- Payments
- Closing balance
The closing balance for a previous period in a cash budget becomes the opening balance for the next period. Therefore, the receipts and payments must be calculated separately, and a worksheet for the cash receipts and cash payments budget is prepared before the actual cash budget.2.65) 2
The GST applies to the sale of most goods and services except for those which are exempt such as:
- Wages
- Interest
- Residential rent
- Education
- Some fresh food items.
When an organisation that has registered for GST makes a sale of its products (e.g. taxable supply), it is required to charge 10% of the sales amount as GST. This amount is paid to the Australian Taxation Office (ATO) and is referred to as “GST payable”.
When the organisation purchases goods and services, it is charged GST of 10% on the purchase price. This is referred to as “GST input tax” and is offset against the GST payable to the ATO. The net amount is then either remitted to or refunded by the ATO.3
An organisation may elect to calculate GST on a cash basis or an accrual basis.
A cash basis may be used where:
- Annual turnover is less than $2 million
- Income tax is usually accounted for on a cash basis
- The Commissioner for Taxation has determined GST can be accounted for on a cash basis.
If a cash basis is applied, GST is calculated on the relevant amounts received or paid during the cash period. With the accrual method, GST is calculated as the value of sales invoiced and relevant expenses charged during the period irrespective of whether cash has been received or paid.1
Enhance your understanding by watching the following 5:34-minute video.
Further Reading
For more information, see the Website of the ATO.
Reflect on the organisational policies and procedures of your current workplace or those from the University of Queensland.
- Make notes about which policies and procedures will likely affect your work budgeting and forecasting for the organisation.
- Make additional notes about how you might change those policies and procedures to reflect the day-to-day budgeting and forecasting requirements better.
Make and keep notes for your future reference, as this information will support your assessment and professional practice.
When an organisation makes sales on a credit basis, it must identify when the cash will be received. A schedule can be prepared for this purpose, similar to the example below:
Marshall Vacuum Cleaners is preparing its cash inflow budget for the next three months, e.g. January, February, and March. Sales are estimated at $170,000 (January), $180,000 (February) and $190,000 (March) plus GST.
Cash sales for each month are estimated at 50% of total sales. Credit sales are estimated at 50% of total sales. It is estimated that 50% of credit customers will pay in the following month of the sale, and the remainder will pay in the month after that, e.g. February and March for January sales.
| Sales | Jan $ | Feb $ | Mar $ | Apr $ | May $ | Qtr $ |
|---|---|---|---|---|---|---|
| Total sales | 170,000 | 180,000 | 190,000 | |||
| Credit sales 50% of total sales | 85,000 | 90,000 | 95,000 | |||
| Credit sales 50% total sales | 85,000 | 90,000 | 95,000 | 270,000 | ||
| Credit sales Jan – 50% of total sales | 42,500 | 42,500 | 85,000 | |||
| Credit sales Feb – 50% of total sales | 45,000 | 45,000 | 45,000 | |||
| Credit sales Mar – 50% of total sales | 47,500 | 47,500 | 0 | |||
| Cash collection | 85,000 | 132,500 | 182,500 | |||
| Add GST 10% | 8,500 | 13,250 | 18,250 | 40,000 | ||
| Total cash receipts | 93,500 | 145,750 | 200,750 | 440,000 |
From the schedule above, a cash receipts budget can be prepared for the quarter as follows:
| Jan $ | Feb $ | Mar $ | Qtr $ | |
|---|---|---|---|---|
| Total cash receipts | 93,500 | 145,750 | 200,750 | 440,000 |
Example 10: Credit sales and accounts receivable
When determining a budget for cash payments, many of the cash payment figures will be fixed costs. Other payments can be defined as a percentage of sales revenue.
The following is an example of how cash payments can be presented:
Based on our previous example, Marshall Vacuum Cleaners has estimated purchases and payments for the quarter to be as follows:
- Purchase of inventories is estimated as 25% of sales, e.g. 25% of estimated sales figures for January, February and March.
- Marketing is estimated as 10% of sales figures
- Miscellaneous expenses are fixed at $5,000 per month
- Rent of premises is fixed at $10,000 per month
- Salaries are fixed at $10,000 per month (GST-free).
- Sales are estimated at $170,000 (January), $180,000 (February) and $190,000 (March), and the business makes all payments in the month they fall due.
| Jan $ | Feb $ | Mar $ | Qtr $ | |
|---|---|---|---|---|
| Cash payments subject to GST | ||||
| Purchases | 42,500 | 45,000 | 47,500 | 135,000 |
| Marketing | 17,000 | 18,000 | 19,000 | 54,000 |
| Miscellaneous expenses | 5,000 | 5,000 | 5,000 | 15,000 |
| Rent | 10,000 | 10,000 | 10,000 | 30,000 |
| Total | 74,500 | 78,000 | 81,500 | 234,000 |
| Add GST 10% | 7,450 | 7,800 | 8,150 | 23,400 |
| Total payments subject to GST | 81,950 | 85,800 | 89,650 | 257,400 |
| Cash payments not subject to GST | ||||
| Salaries | 10,000 | 10,000 | 10,000 | 30,000 |
| Total payments | 91,950 | 95,800 | 99,650 | 287,400 |
From the schedule above, a cash payments budget can be prepared for the quarter as follows:
| Jan $ | Feb $ | Mar $ | Qtr $ | |
|---|---|---|---|---|
| Total payments | 91,950 | 95,800 | 99,650 | 287,400 |
The cash receipts and cash payment budgets can be incorporated into a single cash budget.
The following is an example of what the integrated cash budget could look like.
Example
The open cash balance as of 1 January was $35,000. Based on the cash receipts and cash payments budgets, an integrated cash budget can be prepared as follows:
| Jan $ | Feb $ | Mar $ | Qtr $ | |
|---|---|---|---|---|
| Total cash receipts | 93,500 | 145,750 | 200,750 | 440,000 |
| Total cash payments | 91,950 | 95,800 | 99,650 | 287,400 |
| Net surplus/deficit | 1,550 | 49,950 | 101,100 | 152,600 |
| Opening balance | 35,000 | 36,550 | 86,500 | 35,000 |
| Closing balance | 36,550 | 86,500 | 187,600 | 187,600 |
Example 12: Integrated cash budget
If cash receipt budgets are prepared, a provision for any allowable discounts must be included, as the discount will affect the net profit estimated for each period.
In the following example, a cash receipts worksheet has been prepared, which has factored in any discount allowed on accounts receivable.
Example
Marshall Vacuum Cleaners is preparing its cash inflow budget for the next three months, e.g. January, February, and March. Sales are estimated at $170,000 (January), $180,000 (February) and $190,000 (March).
Cash sales for each month are estimated at 50% of total sales. Credit sales are estimated at 50% of total sales. It is estimated that 70% of credit sales are paid for within a month to take advantage of a 4% discount. The remainder pay in the following month, e.g. 30%. Sales were $160,000 (November) and December ($200,000). GST is calculated on a cash basis.
| Nov $ | Dec $ | Jan $ | Feb $ | Mar $ | Qtr $ | |
|---|---|---|---|---|---|---|
| Total sales | 160,000 | 200,000 | 170,000 | 180,000 | 190,000 | |
| Credit sales 50% of total sales | 80,000 | 100,000 | 85,000 | 90,000 | 95,000 | |
| Cash sales 50% total sales | 80,000 | 100,000 | 85,000 | 90,000 | 95,000 | 270,000 |
| Sales from Nov | 24,000 | 24,000 | ||||
| Sales from Dec | 67,200 | 30,000 | 97,200 | |||
| Sales from Jan | 57,120 | 25,500 | 82,620 | |||
| Sales from Feb | 60,480 | 60,480 | ||||
| Total | 176,200 | 177,120 | 180,980 | 534,000 | ||
| Add GST 10% | 17,620 | 17,712 | 18,098 | 53,430 | ||
| Total cash receipts | 193,820 | 194,832 | 199,078 | 587,730 |
Note: 50% of total sales are cash, and 50% are credit sales. Sales are only recorded for the quarter, e.g. January to March. Sales for November were $160, 000 of which $80,000 were credit sales. 70% of November sales are received in December and 30% are received in January, e.g.30% of $80,000 = $24,000.
70% of December sales are received in January (less 4% discount)
(70% of $100,000) x .96 = $67,200
30% of December sales are received in February e.g
30% of $100,000 = $30,000
Example 13: Cash receipts budgets
As per the requirements for a cash receipts budget with a discount provision (Section 5.6), the same principle applies to the cash payments budget.
In the following example, a cash payments worksheet has been prepared to account for discounts received for purchases paid on credit.
Example:
Marshall Vacuum Cleaners is preparing its cash outflow budget for the next three months, e.g. January, February, and March. Payments are estimated at $42,500 (January), $45,000 (February) and $47,500 (March) plus GST. All purchases are made on credit, and only amounts for the quarter are recorded.
80% of credit purchases are paid in the month following the purchase to take advantage of a 4% discount. The remainder is paid for in the following month, e.g. 20%. Purchases were $35,000 (November) and December ($55,000). GST is calculated on a cash basis.
| Total purchases | Nov $ | Dec $ | Jan $ | Feb $ | Mar $ | Qtr $ |
|---|---|---|---|---|---|---|
| Total purchases | 35,000 | 55,000 | 42,500 | 45,000 | 47,500 | 135,000 |
| Credit purchases – Nov | 7,000 | 7,000 | ||||
| Credit purchases – Dec | 42,240 | 11,000 | 53,240 | |||
| Credit purchases – Jan | 32,640 | 8,500 | 41,140 | |||
| Credit purchases – Feb | 34,560 | 34,560 | ||||
| Total | 49,240 | 43,640 | 43,060 | 135,940 | ||
| Add GST 10% | 4,924 | 4,364 | 4,306 | 13,594 | ||
| Total cash payments | 54,164 | 48,004 | 47,366 | 149,534 |
Note: 80% of purchases are paid for in the month following the purchase to take advantage of the 4% discount, and the remainder is paid in the following month.
November sales: 20% of $35,000 = $7,000 paid in January
December sales: 80% of $55,000 less 4% discount
(80% of $55,000) x .96 = $42,240 paid in January
(20% of $55,000) = $11,000 paid in February2
Example 14: Cash payments budget including provision for discount received
In the previous example, a cash budget was prepared using the cash method of accounting for GST.
When applying the accrual method of accounting, GST becomes payable when invoices are issued to customers, not when the cash is received.
The following is an example demonstrating a cash and accrual option for budgets:
Example:
Using the accrual accounting method, GST is calculated on 10% of sales and purchases made in the current month. Using Marshall Vacuum Cleaners as an example, the accrual option is set out below:
Accrual option:
| Jan $ | Feb $ | Mar $ | Qtr $ | |
|---|---|---|---|---|
| GST on sales | 17,000 | 18,000 | 19,000 | 54,000 |
| GST on purchases | 4,250 | 4,500 | 4,750 | 13,500 |
| ATO payments | 12,750 | 13,500 | 14,250 | 40,500 |
Cash option:
| Jan $ | Feb $ | Mar $ | Qtr $ | |
|---|---|---|---|---|
| GST on sales | 17,620 | 17,712 | 18,098 | 53,430 |
| GST on purchases | 4,924 | 4,364 | 4,306 | 13,594 |
| ATO payments | 12,696 | 13,348 | 13,792 | 39,836 |
Marshall Vacuum Cleaners would have to pay the ATO:
$39,476 using the cash option
$40,500 using the accrual option.
There is no difference in the long term between the amounts paid for GST liability using the methods above. The difference will arise in the timing of the payments to the ATO1
Example 15: Cash budget using the accrual method
