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WHY NOT CASH BUDGETING TOO?
John A. Tyler
Many businesses budget their expected income and expenses for the up-coming fiscal year, and incorporate these budgets into computer prepared financial statements. This assures better control of the business in these discontinuous times .
However, most of these same businesses do not use the same budgeting techniques to forecast and budget cash movement. Managers may attempt to forecast customer payments from an accounts receivable program, but this cash prediction is incomplete and does not deal effectively with the entire needs of the business.
Why not? Its the Financial Statements !
The typical financial statements used by businesses include the Balance Sheet, the Income Statement, and a Statement of Changes in Cash Position, which attempts to show the reasons for changes in cash balances over a specified period of time. However, this statement is a hybrid. The first line in the statement is Net Income or Loss, and the subsequent lines include some useful information, and some not so useful, such as "Net Changes in Accounts Receivable", or "Net Changes in Accounts Payable"
If a business owner is trying to track customer payments against a budget, the information in the standard cash flow statement is not very helpful.
How do we solve this dilemma ?
I propose a format which I call the Statement of Cash Activities. This statement would show the cash activities for a business over a fiscal period and might look like this -
XYZ Company Statement of Cash Activities |
Actual To Date |
Budget To Date |
Cash Beginning Balance |
23,783 |
23,783 |
Cash Received |
||
Customer Payments |
156,325 |
175,000 |
New Bank Loans |
20,000 |
|
Total Cash Received |
176,325 |
175,000 |
Cash Spent |
||
Net Payroll Paid |
70,000 |
75,000 |
Payroll Taxes Paid |
19,600 |
21,200 |
Bank Loans Repaid |
25,000 |
15,000 |
Payments to Vendors |
37,500 |
30,000 |
Purchases of New Equipment |
17,500 |
12,000 |
Occupancy and Maintenance |
6,200 |
6,200 |
Other Administrative Expense |
9,500 |
4,000 |
Total Cash Spent |
185,300 |
163,400 |
Cash Balance, End of Period |
14,808 |
35,383 |
It is obvious that the cash activities did not go according to plan for this fiscal period. The business had to borrow an extra $20,000 from the bank because customer collections [and sales ?] were not according to budget. And there are other variances that will need to be investigated as well. The most useful aspect of this illustration is that the cash activities are presented in a straightforward and understandable form. Questions become obvious and managers can focus their attention to why the actual results differ from their budgeted expectations., not to figuring out the real cash activity.
Can we use this format with existing computer based accounting programs ?
Fortunately the answer is yes ! Modifications to the financial reporting structure and more definition of transactions during data entry allow the business manager to obtain the statement of cash activities as one of the basic monthly financial statements. You know where the cash came from and where it was spent, and you can compare the actual cash activity to what you planned by the use of a cash budget.