The Cash Budget

In this video we're going to walk through an example of how to put together a cash budget for a firm. So first it's important to understand that before you put together the cash budget you need to have all the other budgets they have to be prepared for. So when we think about like the sales budget, the production budget, all these other budgets have to be put together in order to be able to even make the cash budget. So we need to know about our direct material expenditures that we're planning before we would be able to put together the cash budget. So then in addition to that it's just really important to know how important it is to have a cash budget for a firm because you might have the best idea in the world but if you run out of cash you are not going to have a business. So you might say well hey if you have a great business why would you ever run out of cash? Well there might be something like for example things like seasonality of your business you might run a ski resort and it might be an incredible ski resort but you don't plan on the fact that oh wait in the summer months we're just not going to have any cash coming in. You have to go and plan you have to budget for that so that you have the cash when you need it. So let's walk through an example and actually I've chosen an example that would have to do with seasonality and we'll think about our example we've used in the previous budget videos. We'll talk about a you might imagine that a firm that makes bicycles might sell more bicycles in the summer months than it would in the winter time when there's snow on the ground. So we've got this kind of seasonality issue and we can look at that when we think about how our cash is going to flow throughout the firm during the year. So now when we start out with when we do our cash budget the first thing is we start well what is our beginning balance and for the moment let's just focus on quarter one. I've written out all the quarters and then for the year because we're going to do it on a quarterly basis and I've written it out so that you didn't with this video wasn't an hour long with me writing all these things out but if you just focus on this column right here and then we'll get to the other columns later. So the first quarter we're starting out with with our cash balance of $2,500 right so at the beginning of this year we look at the bank account and we say we've got 2,500 bucks but then we need to add in our cash receipts. When we're talking about cash receipts we're talking about cash we collect from customers right so for the most part when we think about cash we're receiving it's just money from customers we could make this maybe more complicated and start thinking we have income from other sources maybe we own a little bit of real estate and we get some rental revenue but we're not thinking about that this is just a really simple example when people buy bicycles or other businesses buy bicycles from us those are our customers and then we're going to receive cash from them. Now this is where it comes into play that we already need to know have done our other budgets for example our sales budget right because our sales budget we're going to know the number of bicycles we plan to sell and the price we plan to sell them at and that's where we're going to get this 15 grand from right in quarter one we went to our sales budget and said okay how much are we going to receive from our customers how many bicycles are we going to sell at what price and so forth so we use that information from that budget to input this $15,000 so that doesn't just come out of thin air it comes from another budget. Now once we know that we can actually put together the cash available right and cash available this is really simple if you think about it this isn't really that complex we're just saying we started with 2,500 bucks in the bank and we're planning on generating 15,000 in cash from the bicycles that we're going to sell in quarter one so cash on hand cash available however you want to think about it we're going to have $17,500 cash in quarter one. Now you might be saying well hey we're going to spend money to get direct materials to make those bicycles and so well that's what's coming next now we think about our disbursements. Now with our disbursements again we've got this issue and here's our disbursements I've kind of got a little little heading there and all these here are our disbursements so when we think about this all these are going to come from those other budgets that's what we talked about that you make the cash budget last because we got to look at the direct material budget and say hey we've budgeted $3,000 in expenditures for quarter one on direct materials we've budgeted $4,000 in expenditures for from the direct labor budget the overhead budget says $2,000 for quarter one and then the SG&A budget says $10,000 so we pull all these numbers from other budgets and so when we think about all those disbursements we can just lump them together and say we've got $19,000 in disbursements and so we can compare that now compare our disbursements this $19,000 right which is the sum of all these right here and then compare that against the cash we had available right so we say we have $17,500 in cash available but we're spending $19,000 hey the disbursements are more than the cash available well what does that mean that means that we're going to have a shortage of cash or a deficiency of cash right and I've got this here we've got this line item excess or shortage and I've got shortage in parentheses and the reason for that is that that means that if this number here is in parentheses it's negative right instead of putting a negative sign we just put it in parentheses that's the custom so we just said cash available minus disbursements is going to be negative 1,500 or 1,500 in parentheses that means that we are going to be 1,500 short this quarter well does that mean that we go out of business and we go well not necessarily because we can go and we can borrow money to well we would like we hope we can borrow money in order to keep the business going so that's going to lead to our next section which is actually called the financing section and I and I left out the the financing title in here because I want to be able to fit all of this onto one screen here so that you can read it I know there's a lot going on just bear with me so the borrowing section is going to be maybe we have a line of credit with the bank right some firms have a thing where they say okay if we ever fall where we have a shortage of cash in this quarter we just generate automatically the bank generates a hundred thousand dollar line of credit at x percent interest rate but we're going to say we're going to make this really simple so that we don't even have to think about interest in our problem we're going to say that you borrow the money from a family member so you go to one of your parents and you say hey I got this great business but in the first quarter we've got a shortage of cash and and and in the summer months when we sell more bicycles everything's going to be all right but just right now I need a little money and they say how much do you need and you say you could say well I just need 1,500 to cover the shortage but then you'd have zero so you're kind of playing fast and loose with how much cash you have but you might say you know as a general rule I like to have at least 2,000 dollars in the bank at any given time just in case there's an emergency or something I didn't plan for so you say I want an ending balance of 2,000 to get that ending balance given you have a shortage of 1,500 what do you need in terms of borrowings to cover the 1,500 and to cover this 2,000 you want to end with well that's going to be 3,500 right because if you took 3,500 and you subtracted out this shortage of 1,500 then that's going to give you two grand right so then you're left with two thousand dollars and repayments if you see these two right here we're talking about repayments we're not gonna we're not repaying this in this quarter we'll repay it at some point in the future when we generate some more money and again we don't have to worry about interest at all because it comes from a family member who is so generous they're not going to charge us interest on the loan and so our final and again we've I hope you can see all this in the screen and that some of it's not being cut out but we started with 15 or 2,500 in cash at the beginning of this quarter and now we're ending the quarter with 2,000 thanks to this this loan this borrowing from one of our family members that helped us deal with this shortage of cash now we can start thinking about and I'll just scroll up so you can see the quarters that was all for quarter one and then quarter two I'm going to walk through a little more quickly because we just went through it we scroll down so now we're going to start with two thousand dollars and you might say where'd you get that two thousand dollars from well we got it because the beginning balance of quarter two is the ending balance of quarter one right so we start with that two thousand and then we say okay now we're receiving 90,000 where did we get that 90,000 from customers came from our sales budget right now that means cash available in 92 grand and then now we've got our disbursements those come from our other budgets our direct material budget our SG&A budget and so forth disbursements total up to 46,000 we take the cash available in 92,000 subtract the disbursements of 46,000 and that leaves us with another 46,000 but this time it's an excess that means that we have more cash after we've said okay how much cash do we have and how much do we spend we have 46,000 left over now we don't need to borrow anything this time because we have an excess of cash we have extra cash and so we're going to do a repayment right we're going to do repayment and so this is 3,500 to repay that loan to the family member and I've got the 3,500 in parentheses because we're saying this is negative this is this is I've just just a little convention here so we know that this 3,500 from the borrowing has been zeroed out and so we're saying that ultimately even though we have an excess of cash of 46,000 we're subtracting the 3,500 we've repaid a loan and so now our ending balance is 42,500 which is 46,000 minus the 3,500 repayment now in quarters three and four it's a little simpler because we don't have any borrowings or repayments or anything going on and you notice so so I'm not going to walk through all of quarter three and quarter four because they're fairly straightforward you should be able to figure it out at this point now when you look at it we say hey we're really generating a lot of cash in these summer months right because we're collecting a lot more from customers right quarter two and quarter three we're we're generating 90,000 and 60,000 in cash receipts from customers respectively whereas in quarter one we only generate 15,000 right because there's not a lot of people buying bicycles in January they're buying them in June and and so forth so we've got the seasonality issue where we had problems in quarter one with cash but we were able to budget we were able to plan and show our family member and say hey look we're going to generate a lot of cash in the summer right well we're going to sell a lot of bicycles we just need you to float us this money right now so we can deal with the temporary shortage but if we didn't have a budget if we didn't have a plan then we would have all kinds of issues because we we don't really have a plan of how we're going to have the cash to finance and fund our business throughout the year and then when we we look at our final column we've got our year year total and it basically a lot of this is just summaries of things throughout the year here's the summaries of our disbursements and so forth but when we look of course at the beginning balance it's the beginning balance of quarter one not not the total of all these for for reasons we talked about in our previous videos and and ultimately at the end of the year we're going to be left with seventy three thousand five hundred dollars which is also the ending balance of course for quarter four