The following points highlight the top three methods for preparation of cash budget. The methods are: 1. The Receipt and Payments Method 2. Adjusted Profit and Loss Method 3. Balance Sheet Method.

Preparation of Cash Budget: Method # 1.

The Receipt and Payments Method:

Under this method all anticipated cash receipts are carefully forecasted from a particular period.

Cash receipts from the following sources are estimated:


(i) Cash sales;

(ii) Cash receipts from Debtors;

(iii) Dividends;

(iv) Interest on investments,


(v) proceeds from sale of assets;

(vi) Royalties etc.

Cash disbursements required for the period are considered.

Cash disbursements consist:


(i) Cash purchases of raw materials;

(ii) Cash payments to creditors. This depends on credit terms extended by suppliers;

(iii) Payments for wages, salaries to staff, commission.

(iv) Payments for other factory office and administrative and selling and distribution overheads.


(v) Other disbursements including payments for fixed assets, short-term and long-term investments. In-case, there is an excess cash after meeting all obligations loans may be repaid.

Problem 1:

From the following information, prepare a cash Budget for the months of January, 2003 to April 2003:

Cash Budget with Problem 1


Wages to be paid to workers Rs.10,000 each month. Balance at Bank on 1.1.2003 was Rs.2,000.

It has been decided by the management that:


1. In the case of cash deficit within the limit of Rs.10,000, arrangement can be made with bank.

2. Deficit of fund exceeding Rs.10,000 but not exceeding Rs.50,000 can be met by issuing 12% debentures.

3. In the case of deficit of fund exceeding Rs.50,000, issue of shares is preferred (it is within the limit of Authorised Capital).


Preparation of Cash Budget: Method # 2.

Adjusted Profit and Loss Method:


This method is termed as the Cash Flow Statement because it converts the profit and loss account into a cash forecast. This method is particularly useful for long-term forecasting, say, for a period of four or five years.

Preparation of cash budget under this method needs the following information:

(a) Expected cash balance at the beginning of the period.

(b) Net profit forecast for the period.

(c) Changes in working capital.


(d) Capital expenditure and sales of plant and machinery.

(e) Capital receipts

(f) Dividends.

In preparing the cash forecast one has to proceed with the budgeted profit for the period, then to adjust the figures for non-cash items already debited to Profit and Loss Account, changes in working capital, capital receipts and payments of dividends and tax. A format of cash statement under this method is given below for clear understanding. Cash Forecast for the Four Years 200X – 200X.

Preparation of cash budget under this method will relatively be easy if a budgeted profit and loss account and budgeted balance sheet are available for each budget period. Most of the items shown can be ascertained by comparing balances shown in the Balance Sheet of one year with those of the succeeding years.

Problem 2:

Cash Budget with Problem 2

Cash Budget with Problem 2

Cash Budget with Problem 2

Preparation of Cash Budget: Method # 3.

Balance Sheet Method:

Under this method a budgeted Balance Sheet is prepared for the next period showing all items except cash and bank balance. The two sides of the Balance Sheet are then balanced, and the balancing figure is considered as cash. If the assets side is larger than the liabilities side, this would reveal a bank overdraft; if the liabilities side is larger this will signify a balance at the bank.


If we follow the Balance Sheet of the previous problem, the total of the liabilities side is Rs.57,33,700: