Cash Budget - Calculation of Wages, Collection from Debtors, Purchases and Payment Made to Creditors - Case Study Example

1. Cash Budget is as follows   April May June Opening Balance 100000 100000 100000 Receipts       Cash Sales receipts (60%)(Note 1) 1080000 1320000 1500000 Cash Sales receipts (40%) (Note 1) 800000 720000 880000   1980000 2140000 2480000 Payments       Purchase of materials (60%)(Note 2) 660000 750000 840000 Purchase payment (40%)(Note 2) 300000 440000 500000 Wages (20% of sales) (Note 3) 440000 500000 560000 Salaries (Note 4) 40000 40000 40000 Promotion (Note 5) 55000 55000 55000 Property Tax (Note 6)     60000 Insurance (Note 7) 30000 30000 30000 Utilities (Note 8) 25000 25000 25000 Interest expenses     8000 Corporation tax (40% of prior period) (Note 9) 129600     Purchase of equipment and facilities 28000 324000     1707600 2164000 2118000 Balance 272400 -24000 362000 Cash Borrowed   124000   Cash Invested 172400   262000 Closing Balance 100000 100000 100000 Note 1: Calculation of collection from debtors   February March April May June Total Sales 2000000 1800000 2200000 2500000 2800000 60% in the following month 1200000 1080000 1320000 1500000 1680000 40% in the second month after sale 800000 720000 880000 1000000 1120000 Note 2: Calculation of purchases and payment made to creditors   March April May June Raw Materials (50% of sales) 900000 1100000 1250000 1400000 60% paid in the month of purchase 540000 660000 750000 840000  40% in the next month 360000 440000 500000 560000 Note 3: Calculation of wages   April May June Wages (20% of sales) 440000 500000 560000 Wages paid in same month 440000 500000 560000 Note 4: Calculation of Salaries   April May June Salaries 40000 40000 40000 Paid in same month 40000 40000 40000 Note 5: Calculation of Promotion   April May June Promotion 55000 55000 55000 Paid in the same month 55000 55000 55000 Note 6: Calculation of Property taxes   April May June Property taxes 20000 20000 20000 Paid at the end of quarter     60000 Note 7: Calculation of insurance   April May June Insurance 30000 30000 30000 Paid in the same month 30000 30000 30000 Note 8: Calculation of utilities   April May june Utilities 25000 25000 25000 Paid in the same month 25000 25000 25000 Note 9: Calculation of taxes     Profit for first quarter 324000 Taxes (40% paid in April) 129600 2. Budgets are an integral part of every individual. It has been practiced since ages. Each and every individual budgets his time, his expenditure, his future income and so on. So, does every organization. Budgets help to peep into the future and help to plan accordingly. Every organization plans before hand what they will do in the near future. They work towards the accomplishment of those goals and in the process of doing so certain things go wary. It becomes important to find out the deviations. While devising the strategy next time it is important to keep those deviations in mind and see that such mistakes don’t occur again. The importance of budgeting increases when real money is involved. A slight increase in the actual expenditure would result in huge losses Doomy Corporation as the cost to produce increases. It becomes important to find the deviation so that steps could be implemented at the right time. Doomy Corporation comprises of different departments like purchasing, manufacturing, finance and selling. Doomy Corporation should have different strategies for each department so that they can work towards the betterment of the organisation. These departments strategies should be compiled in such a way that it reflects in the overall strategy of the organisation. It is not always necessary that all the plans will deliver so organisations need to evaluate the outcome on a continuous basis. They need to control the outcomes and also modify things if required so that the overall strategy of the organisation is achieved. For example, if a certain section of customers delay their payments it will result in a cash crunch. This will make it important that Doomy Corporation is able to devise a strategy where importance is laid on cash budgeting. (Paul, 2009) Doomy Corporation needs to ensure that cash management through budgets are sound and measures are taken so that they have sufficient funds to meet the future expenses. This will require that the corporation sometimes borrow money and sometimes invest money so that they are able to ensure that the cash is managed properly and have sufficient funds. Doomy Corporation needs to different techniques and methods to have a fair estimate of the cash required each month. With the growth and advancement of technology better tools have been developed which helps to quantify this and thus affects the accounting system for managers. (Beverly, 1996) It is important that Doomy Corporation prepares a contingency plan which will help them to identify the areas that needs to be worked upon to ensure that cash crunch situation are dealt in a better way and Doomy Corporation is able to ensure proper cash management techniques. Doomy Corporation needs management accountants spend more time on strategy related activities. This has set two important things to watch out for. Firstly, “strategic management accounting consists of strategically planned accounting techniques”. Secondly, “management accountant spend a considerable amount of time in the decision making process”. (Robin & Susan, 2003) This will help Doomy Corporation to ensure that strategies are drawn in a manner which will help to ensure that the debts are paid on time and the collection of money is also on time. This will help Doomy Corporation to ensure that a strategy is in place which ensures proper cash budgeting techniques. Doomy Corporation can look towards Just in time costing. This approach helps to reduce waste. These approaches help the management accountant to keep minimum of inventory. The management accountant based on past data ascertain the requirement of inventory in a particular period and by identifying the supplier he orders the minimum required quantity so that the investment is as per the requirement and capital is not blocked in it. It will help Doomy Corporation to ensure proper cash management and ensure minimum investment in inventory at the same time help to ensure that the cash collection and payment is better. This will shape the cash management procedure at Doomy Corporation and help to improve their cash management. 3. The benefits that accrues from budgeting system is as follows Planning for the future: Budgets help in proper planning as it enables the management to achieve their objectives. It’s a tool to forecast the future using the current performance. Doomy Corporation based on it can understand their future earning sources and plan their expenditure accordingly which will help in better management. (Hope & Fraser, 2003) Better Coordination: Budgets help in coordination as the preparation of the budget involves almost all the department of the organization. This increases the effectiveness and makes people work in close contact with each other. Cash budget will thereby help to ensure that decision are taken which will improve the efficiency and help Doomy Corporation to ensure that proper cash management techniques are used to control the working of the company. (Atrill & McLaney, 2006) Accountability is created: Budgets create accountability for managers and departments who prepare the budgets thereby ensuring proper management and no misguided information. This will thereby help Doomy Corporation to bring a change in their working and create an environment where strategies are drawn based on it. This will help to multiply the benefit of budgeting and help in decision making. Analyzing the transaction: It becomes easy to analyze the revenue and expense based on the budgeted figures and estimate the future potential. This helps to calculate any various against the actual and serves as a control in operations. This will help Doomy Corporation to manage their cash accordingly and will guide them in decision making. (Hope & Fraser, 2003) Helps in motivation: Since budget preparation involves the entire staff of the organization this motivates the employees as they appreciate in the decision making for the future of the organization as one team. It also helps in team building in the organization. (Hope & Fraser, 2003) The limitations of budgeting are as follows Development in technology makes standard outdated: The developments in technology and methods to estimate the budgets change on a rapid basis which might result in the forecast being outdated. This will result in the budgets to be flawed and the decisions based on those will be inefficient and result in wastage of resources. (Atrill & McLaney, 2006) Certain factors beyond control: While a budget is prepared the organization considers the factors which can have an effect on the future condition. There are certain conditions which are not under the control of the management which will have an effect on the budget. This will make the budgets inefficient and will result in decision making which doesn’t bear fruit for the business. (Atrill & McLaney, 2006) Difficult to distinguish roles of manager: Organization faces difficulty in demarcating the different roles different managers will play as there are certain areas which are over lapping. This will make the budget inefficient and could lead towards a clash between the managers which might give rise to conflicts and result in a poor forecasted budget for the organization. (Atrill & McLaney, 2006) References Atrill P & McLaney E, (2006), “Accounting & Finance for non specialists”, 3rd edition, Prentice Hall, Pearson Education Beverly R, (1996), “Strategic Management Accounting-the emperor’s new cloth”, Management Accounting Research, Volume 7, Issue 3, pg 134-138 Hope J & Fraser R, (2003), “who needs budget”, Harvard Business Review, Product Number 306, Harvard Business School Publishing Paul C, (2009), “Accounting for Managers: Interpreting Accounting Information for decision making”, 3rd Edition, Prentice Hall Robin & Susan, (2003), “In search of Strategic Management Accounting”, social science Research Network, Volume 14, Number 3, pg 29-37 Read More