MEANING AND DEFINITION
Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income.
DEFINITION
The Chartered Institute of Management Accountant of London (CIMA) defines a Budget in the following words.
“A
Budget is a plan quantified in monetary prepared and approved prior to a defined
time, usually showing planned income to be
and/or expenditure to be incurred during that
and the capital to be employed to attain
objective.”
PURPOSE:
The budget of an enterprise serves the following purposes:
(i) Budget is an aid in making and coordinating short- range plans.
(ii) It is a device for communicating these plans to the responsibility center managers.
(iii) Budget is a way of motivating managers to achieve their responsibility centers goals.
(iv) It is a bench mark for controlling on-going activities.
(v) Budget is a basis for evaluating the performance of responsibility centres and their managers.
Cash Budget
A cash budget is an estimation of the cash flows for a business over a specific period of time.
This budget is used to assess whether the entity has sufficient cash to operate. Cash budget, an estimation of the cash inflows and outflows for a business is data collected over a specific period. Operating Budget shows the company's projected revenue, as well as, expenses for a future period normally in the next year.
Steps for Preparing a Cash Budget:
Steps for preparing a cash budget are given as follows:
• (i) Record the cash receipts.
• (ii) Total the cash receipts.
• (iii) Record the cash payments.
• (iv) Total the cash payments.
• (v) Calculate the net receipts (payments) by subtracting total payments from total receipts.
• (vi) Record the opening cash balance – beginning of the 1st
period.
Sections of a Cash Budget:
• i) The first section is receipts section and lists all cash inflows. This section can be a little tricky as it is not
necessary that all revenue from sales are received in cash
instantly. Some sales could be on credit basis and some cash may be received from some other sources, such as on
disposal of a non-current asset.
• (ii) The second section is payments section and shows all cash payments which are planned for the budgeted period.
There are however some non-cash expenses which do not involve cash outlay and are not included in cash budget, e.g., depreciation, bad debts, etc. Likewise cash may be
spent for capital items such as payments for purchasing non current assets, repayment of loans etc.
