Master Budgets and Performance Planning

Introduction

A budget is one of the most useful planning tools since it helps companies to remain within means, handle emergencies, and to remain profitable at the same time. According to Neely, Bourne & Adams (2003), a realistic cash budget establishes the available cash resources, estimates expenses, and anticipates revenue streams. A detailed budget is the one that combines the previous trends with real forecasts for a particular period. Budgets also help organizations to set their objectives and priorities appropriately. It tells where funds for executing new strategies will come from and how much each strategy is capable of generating. An effective budget is the one that breaks down anticipated revenues and expenditures into a quarter or a month, depending on the size of the business.

Every department should prepare its budget separately based on the needs and revenue generation abilities. Collectively, the departmental budgets form the master budget for a company. Companies use the budget as a tool for evaluating the overall performance. For example, if the sales go below the budgeted figure during a particular period, the management finds the expenses that need to be cut for the business to remain profitable. Investors also check evidence of better budgeting practices before they can invest in a company since it is an indication of how well the business is able to stick to its plans (Neely, Bourne & Adams, 2003). The lenders dig deep into the financial history of a company to determine its ability to fulfill short-term and long-term financial obligations. The cash budget is part and parcel of the financial history of a company.

Depending on how they expect to collect their sales, organizations also prepare cash receipts budget. Given that every company has a cash sales and credit sales policy, it is easy to determine each of these components. Wild & Shaw (2019) note that the past accounts receivables can be analyzed to determine when the credit sales are payable. On the other hand, companies also prepare a cash budget as long as the information about cash receipts and cash payments to other operating activities is available. The cash budget allows a company to establish the cash account balance for a three-month period (quarter). Organizations need cash to pay for operating activities, such as the purchase of materials, rent, salaries, interest on a loan, and other overhead costs (Qiong, 2011). The amounts for cash disbursements for expenditures can be obtained from other budget schedules for purposes of preparing the cash budget.

Prepare a cash budget for July, August, and September

The cash receipt budget for A1 manufacturing is a snapshot of the cash inflows and outflows for the budget period. The cash receipt budget indicates the cash balances to fulfill cash obligations for the three-month period. Thus, the cash receipt for A1 manufacturing company for the months of July, August, and September is as indicated below;

A1 Manufacturing

Cash Receipts Budget

For July, August, and September

The first step in preparing the cash receipt budget is to establish cash sales, given that not all sales revenues are received instantly (Carraher & Van Auken, 2013). According to A1 manufacturing sales policy, 80% of the sales are on credit while 20% is received cash. To get the cash sales, we subtract the ending accounts receivable from the total sales within that month. We then add the collections from the previous month’s receivables to obtain the total cash receipts as indicated above.

Prepare a cash budget for each of the months of July, August, and September

A1 Manufacturing cash budget shows the net cash receipts at the end of the period after adjusting with the cash balances at the beginning. The first step is to determine the total cash available by adding the opening cash balance to the cash receipts from the customers. We then deduct the cash payments budgeted for the three-month period. The payment for direct materials, direct labor, and factory overheads are provided in the schedule. However, sales commission has to be obtained as 10% of the sales for the specific month. Payment for sales representatives and office rent are also provided in the additional information. Interest on loan for July is calculated from the accounts payables of the previous month 1% of ($5,100). The final step is to charge the total payment disbursements from the available cash balances. For A1 manufacturing, the net ending cash balances for July, August, and September are $12,889, $26,980, and $36,740, respectively.

A1 Manufacturing

Cash Budget

For July, August, and September

Preparing the cash budget helps A1 manufacturing company to determine the short-term cash requirements, thus giving the management time to take the right actions to avoid cash problems. As Jensen (2003) points out, it helps a company to determine its ability to meet debts and accounts payables early enough to take advantage of cash discounts. The cash budget also helps A1 manufacturing company to know the maximum sales it can make on credit to its customers without experiencing liquidity challenges. Finally, the cash budget is useful to the management as it tells the minimum cash balances to be maintained every month. The company can then use the surplus amount to make short-term investments. In a nutshell, A1 manufacturing cash budget indicates that the business is financially healthy since the ending cash balances for the three-month period are above the recommended cash balances of $12,600. The cash balances increase steadily during the three-month period, which shows the company is doing well in terms of collecting accounts receivables and controlling the expenditure.

Conclusion

Overall, cash budgets help businesses to track their expenditures and monitor the revenues. It shows how well the business can stick to what had been planned. A1 manufacturing cash budget, for instance, allows the management to identify challenges and opportunities for the future. From the receipt and cash budget, the company ensures that it has sufficient cash required to perform the regular operations.

References

Carraher, S., & Van Auken, H. (2013). The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), 323-336.

Jensen, M. C. (2003). Paying people to lie: The truth about the budgeting process. European Financial Management, 9(3), 379-406.

Neely, A., Bourne, M., & Adams, C. (2003). Better budgeting or beyond budgeting? Measuring business excellence, 7(3), 22-28.

Qiong, L. I. U. (2011). Performance Evaluation of Financial Expenditure in Performance Budge Reform. Journal of Shanxi College for Youth Administrators, (2), 24.

Wild, J. J., Chiappetta, B., & Shaw, K. W. (2019). Financial and managerial accounting: Information for decisions. Boston: McGraw-Hill Irwin.