# Cash Budgets: Practical Problems and Solutions

### Reviewed by Subject Matter Experts

Updated on January 31, 2024

## Problem 1

From the information below, prepare a cash budget for the period from January to April.

 Expected Sales Expected Purchase \$ \$ Jan. 60,000 Jan. 48,000 Feb. 40,000 Feb. 80,000 Mar. 45,000 Mar. 81,000 Apr. 40,000 Apr. 90,000

The wages to be paid to workers amount to \$5,000 each month. Also, the bank balance on 1st January was \$8,000. The management decided on the following:

• If the deficit fund is within the limit of \$10,000, it is possible to make arrangements with the bank.
• If the deficit fund exceeds \$10,000 but is within the limit of \$42,000, the issue of debentures is preferred.
• If the deficit fund exceeds \$42,000, the issue of shares is preferred (considering the fact that it is within the limit of authorized capital).

### Solution

 Particulars Jan. Feb. Mar. Apr. Receipts: \$ \$ \$ \$ Opening balance 8,000 15,000 - - Sales 60,000 40,000 45,000 40,000 Issue of debentures - 30,000 41,000 - Issue of shares - - - 55,000 Total 68,000 85,000 86,000 95,000 Less: Payments Purchases 48,000 80,000 81,000 90,000 Wages 5,000 5,000 5,000 5,000 Closing cash 53,000 85,000 86,000 95,000 15,000 - - -

## Problem 2

From the information below, prepare a cash budget for a company for April, May, and June 2024 in a columnar form.

 Month Sales Purchases Wages Exp. Jan. (actual) 80,000 45,000 20,000 5,000 Feb. (actual) 80,000 40,000 18,000 6,000 Mar. (actual) 75,000 42,000 22,000 6,000 Apr. Budget 90,000 50,000 24,000 6,000 May Budget 85,000 45,000 20,000 6,000 Jun. Budget 80,000 35,000 18,000 5,000

You are further informed that:

• Wages are paid half monthly and the rent of \$500, excluded in expense, is paid monthly.
• Cash and bank balance on April 1 was \$15,000, and the company aims to keep it below this figure at the end of every month. The excess cash is placed in fixed deposits.

### Solution

Cash Budget for 2024

 April (\$) May (\$) June (\$) Cash & bank balance 15,000 11,700 12,700 Add: Cash sale (20%) 18,000 17,000 16,000 Cash collections from Drs. 66,000 70,000 66,000 99,000 98,700 94,700 Less: Cash outflow Cash flow (10%) 5,000 4,500 3,500 Payment of Crs. 37,800 45,000 40,500 Wages 23,000 22,000 19,000 Rent 500 500 500 Exp. 6,000 6,000 6,000 Fixed deposits 15,000 8,000 13,000 Cash balance (closing) 21,700 12,700 13,200 99,000 98,700 94,700

## Problem 3

From the following information, prepare a monthly cash budget for the three months ending 31st December 2024.

 Month Sales (\$) Materials (\$) Wages (\$) Production (\$) Admin. Selling, etc (\$) Jun. 3,000 1,800 650 225 160 Jul. 3,250 2,000 750 225 160 Aug. 3,500 2,400 750 250 175 Sep. 3,750 2,250 750 300 175 Oct. 4,000 2,300 800 300 200 Nov. 4,250 2,500 900 350 200 Dec. 4,500 2,600 1,000 350 225

The credit terms are as follows:

• Sales — 3 months to debtors. 10% of sales are in cash. On average, 50% of credit sales are paid on the due dates, while the other 50% are paid in the next month.
• Creditors for material — 2 months.

The lag in payment for wages is 1/4 month and 1/2 month for overheads.

The cash and bank balance on 1st October is expected to be \$1,500.

Other information is given as follows:

• Plant and machinery are to be installed in August at a cost of \$24,000. This sum will be paid in monthly installments of \$500 each from 1st October.
• Calls on 250 equity shares @ \$2 per share are expected on 1st November.
• Income tax (advance) is to be paid in December \$500

### Solution

 Cash Budget for Three Months Ending 31 Dec. 2024 Details: Oct. (\$) Nov. (\$) Dec. (\$) Balance b/d 1,500.00 537.50 350.00 Receipts (estimated): Sales 3,212.50 3,462.50 3,712.50 Capital - 500.00 - Dividends - - 250.00 Total (A) 4,712.50 4,500 4,312.50 Payments: Creditors 2,400.00 2,250.00 2,300.00 Wages 787.50 875.00 975.00 Overheads: Production 300.00 325.00 350.00 Adm. S. & D. 187.50 200.00 212.50 Pref. Dividend - - 2,500.00 Income tax - - 500.00 Plant and Machinery (500 each) 5,00.00 5,00.00 5,00.00 Total (B) Year 4,175.00 4,150.00 7,337.50 Balance c/d (A - B) 537.50 350 (-3,025)

#### Calculation of Amount of Sales

 Month Sale (\$) Oct. (\$) Nov. (\$) December (\$) Jun. 3,000 1,350.00 - - Jul. 3,250 1,462.50 1,462.50 - Aug. 3,500 - 1,575.00 1,575.00 Sep. 3,750 - - 1,687.50 Oct. 4,000 400.00 - - Nov. 4,250 - 4,250 - Dec. 4,500 - - 450.00 Total - 3,212.50 3,462.50 3,712.50

### Calculation of Wages

1/4 wages for September and 3/4 wages for October. Therefore, the calculation is:

(1/4 x 750) = 187.50

3/4 x 800 = 600

Total = 787.50

The wages for the other months can be calculated using the same approach.

Do you want to further test your knowledge about budgeting? We have prepared more quizzes for you.

## Cash Budgets: Practical Problems and Solutions FAQs

About the Author

### True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.