 Namaste. In last two sessions we have been discussing about budgets. So I think you already know that budget is a very important technique for planning as well as control. Firstly budget serves a very good base for a planning. You have a goal. The goal is divided and stated in a form of a quantifiable objective or a financial measure. Then an overall goal is divided into functional areas. So we prepare based on the master budget we go to sales budget, then we go to budget for each function and then each functions budget is well coordinated with each other. So in the last session we had discussed that if sales is 24000 considering the stock requirements we go for production. Then whatever is the requirement for production accordingly we go for purchasing of raw material. So there is no excessive spending of any resource. So we try to see that there is a optimal allocation of resource and the functioning of each of the division is well coordinated. That is achieved in the budget. This also serves as a control purpose because once the actuals are ready we compare the budget with the actual and try to take quicker corrective action. I hope you remember all these things. Now let us go for one more step in functional budget. We prepare the budget for various functions based on all these budget we prepare what is known as cash budget. Now cash budget is an estimated statement for cash in the next quarter or next 6 months or next 1 year. Now according to cash budget we come to know what is likely to be the availability of cash. So that if there is a excess cash we can invest it in a fruitful manner instead of keeping it idle. And more important if there is a shortage of cash we can make arrangement for the cash on time. That is very important thing because if you do not make timely arrangement in the last moment company will realize that there is a cash shortage and cash shortage has many negative consequences because we will fail to pay our suppliers or employees on time they will be unhappy bad name will spread about the company. In worse cases there are also cases where company becomes bankrupt because if it fails to pay creditors or bankers on time then those parties will go to court against the company and there are instances where even very good companies have become bankrupt because of poor cash and working capital management. So there is one part of functional budget that is known as cash budget it serves as a basis for scientific estimation of cash requirement not only for the whole year but broken down month wise or quarter wise. Now this is a bit tedious calculation not very difficult but you will have to do lot of calculation because each and every budget will have to be incorporated we will have to see the credit terms as to when the payment is to be made how much is a credit period allowed by the creditors or how much credit we give to our customers based on all this we calculate the availability for cash. Let us take the case I hope you can solve it even though it might be the first case you can just read it carefully and solve it but please take a print out and try to read it along with me. Now Weibhav Limited a newly started company wishes to prepare a cash budget from January cash budget for the first 6 months from the following estimated revenues and expenses. So sales are given for each of these months all the figures are in rupees from January to June you can see sales are slowly picking up from 20,000 then 20 to 28, 36, 30 and 40. So sales are consistently going up the requirement for material is 20 then it went down then again it increased. So they would have prepared a raw material consumption budget which is given over here then budget for wages which is more or less constant slightly increased then the production overheads which are again somewhat constant selling and distribution overheads. So all the estimated profit and loss figures are available. Now there is some additional information that in the beginning that is on 1st January they have a cash balance of 10,000 new machinery is installed at 20,000 on credit and that is to be repaired in 2 installments in March and April sales commission is 5 percent of total sales to be paid within a month then rupees 10,000 is amount of share allotment may be received in the month of March. So I hope you know about share allotment when a company issued shares many people show interest by way of applying for the shares then company allots them shares and next installment they pay in the form of share allotment money. So company is likely to receive 10,000 from the shareholders in the month of March. Along with the share capital they would also pay share premium. So share premium amounting to 2000 is also obtained with share allotment. In other words we will receive 10 plus 2 that is 12,000 in the month of March then this credit periods are very important period of credit allowed to suppliers is 2 months period of credit allowed to customers is 1 month delay in the payment of overheads is 1 month delay in the payment of wages is half month assume cash sales to be 50 percent of total sales. So out of these sales 50 percent are cash 50 percent are on credit. Now with this much of information try to prepare a cash budget are you ready as I told you you must have a print out take it carefully go on marking each item. So out of the given sales and expenses which amount is payable in which month you will have to calculate and then make the budget. So for your ease I have just shown you a structure prepare a cash budget for 6 months. So you will need to make 7 columns particulars and then January to June just to give you a hint I have given you opening balance in the beginning it was given that the opening balance is 10,000. These are the balances for the next months calculated by me but I do not think you need them so I will hide them fine but you have opening balance for January which is given. Now go on making estimation for receipts and expenses and with each of the available information you can make a cash budget ok. So we have opening balances. Now as far as the income is concerned our major income is obviously sales. Now from that we get two types of receipts we have got cash sales which are 50% of sales and remaining 50% is credit sales ok. So we will add two things here cash sales 50% collections from debtors that is money which will come from credit sales in the next line because they would come in the different months. Now let us go to the sales, sales are 20, 20 to 28 and so on. Now if you just take the sale of January 20,000 when will you receive cash from it as per the given data assume that cash sales are 50% of total sales. That means from 20,000 cash sales are 10,000 that you will receive in the immediate month same month and remaining 50% that is remaining 10,000 is sold to customers on credit the period of credit allowed to customer is one month ok. So out of 20, 50% is 10 received in the same month remaining 10 will be received with a lag of one month. So we will sell it on credit we will receive nothing in that particular month but we will receive it in the next month getting it ok. There might be some bad dates and RDD and so on but no such complications are given in the case very simple calculation out of total sales 50% for cash and remaining will be sold on credit which will be month received after one month fine. So it is very simple you know that the total sale is 20 of that 50% that is 10 will come here 10 will come here fine. Now do it for all this for your understanding I am just pasting the sales here do not write it this is just for your calculation sake. So I have written your sales like this as per the terms 50% will be received in the same month remaining 50% in the next month. So how much will be in the month of Feb now 11,000 and remaining 11,000 will be received from customers in March. So I hope you are getting it very easy. So 14, 14 so like that actually go on writing 18 in the same month April remaining 18 in March 15, 15 and 20 remaining 20 will go in July which we are not recording. Are you getting it please write it along with me do not just sit and look at the case. So this is cash sale and credit sale. Now shall I remove this, this is no longer required I will just put it in different color for your understanding later on will remove this. If you are getting too much confused you can make a separate working note below but I think it is not required because it is 50, 50% you can directly write it in the cash present. Now is there any other receipt answer is yes there is some money received from share allotment along with the share premium there on. So go to the case how much money is going to be received 10,000 as a share allotment money to be received in March along with the premium of 2000. So share allotment this is going to be received only once that is in the month of March dash in all the months fine. Is there any other receipt I think there is no other receipt but there are few other payments expenses as well as machinery. So you can make the total of payments now sorry receipts now this 10,000 plus 10,000. Your total is 20 in the month of February how did you get 39 actually you would not be able to get because it is A plus B, A is not yet known to you we will calculate and then you will come to know. So I will remove this sales I think now you no longer need it now let us go to payments. Now which is the first payment material. So you have been given material cost for all the months how are the payment terms it is given that period of credit allowed by suppliers is 2 months. So January purchase of 20 you do not have to pay in January you do not even have to pay in February you can directly pay it in the month of March okay. So if you go for material cost add a row there for material no payment in January no payment in February directly write 20,000 in the month of March. So if you go here you have got 20, 14, 14, 22, 20, 25. So these 4 amounts only will be paid from the beginning of March, March, April, May and June fine so please write it now here 20, 14, 14, 22 fine getting it now next one is wages. Now what are the terms of payments for wages, wages are given for all the months do you pay the wages in the same month they have given that delay in the payment of wages is half month. So how will you calculate in other words half of the wages will be paid in the same month remaining half is paid in the next month. So out of 4,000 of January paid 2000 in January remaining 2000 in February and so on. Now for your simplicity we have made a small working note here if required you can also make a working note. So I have written wages then compute the 50% right pay them in the same month remaining 50 pay in the next month fine. So these are the wages for all these months starting from 4,000 50% are to be paid in the same month. So 2000 and remaining 50% is to be paid with a lag that is in the next month fine. So this 4,000 is broken down into 2000 and 2000 4400 is broken into 2200 and 2200 half in the next month half in the same month half in the next month are you getting it. So make the total now so the total of wages I think this figure is not visible here so basically you have to take total of 2000 and nil so it will become 2000 I will just copy this fine. So in the month of Jan you only pay half the wages and from February onwards half of the same month half of the next month fine. So please write the wage related figures here are you able to get it fine so all these figures are calculated here. Now the next one overheads however overheads paid overhead is very simple there is a delay in the payment of one month. So this month's overheads are period just paid in the next month directly so nothing in the first month that is January you will pay the January overheads in February. So you can just write in the next month all these figures. So there will be dash in the first month January and February onwards pay the overheads for the earlier month that is January 4000 will be paid in February 4200 will be paid in March and so on. Same way for both production overheads as well as the selling and distribution overheads fine getting it. I will just write the figures the heading properly I hope you are able to solve it with me ok. So the total overheads production as well as selling distribution overheads are these figures you can go here and the total overhead for each month is transferred and paid in the next month. Now any other payment is involved just read the case carefully there are some more payments like for machinery and there is also a payment to be done for commission. So sales commission at 5% on total sales is to be paid within a month. So if you look at the sales which is 1004 January then you need to pay the sales commission. So the next payment which is sales commission at 5% it is stated that it will be paid within a month that means it is to be paid with a lag of a month not in the same month within a month that is in the next month. So on the sales which was 20,000 in the month of January 5% commission. So 20,000 into 5% that means 1000 will be paid in the month of February. So I have already stated it here sales commission at 5% and write it in the next month. So dash in January 1000 in February and so on ok. So take this sales figure and take 5% of that are you able to do it? If you want to see the sales figure I can just make it visible to you fine for each of the sales figure it is 5%. Any other expense or payment yes because you have to also pay for the purchase of machinery. Now how much is the amount? It is given that total machinery installed is 20,000 and it is to be paid in two equal installments in March and April fine. So 10,000 in the month of March 10,000 in the month of April. This is the total amount which is paid. Now since all payments are over check whether any other payment is left but I think all are done take the total of payments. So 2000 is the only payment in January. In other months take the total 9,200, 39,800 and so on are you able to get it? So you can realize that due to the availability of credit the payment in January was very very less only half of the wages. In February also it was relatively small some of the operating expenses but from March onwards there was a lot of requirement of cash particularly because material is to be paid with a lack of 2 months we also had to pay for machineries etc. So the total payments from March, April were high again they were slightly less in May and again they increase in the month of June fine. Now look at the availability of cash. First of all for each month compute the balance. So how will you know the balance because you know the opening balance 10 for the month of January you can take the total cash available 20 minus 2. So closing balance of January is 18 that closing balance will be the opening balance for February. Got it? Now 18 plus 11 plus 10 so total is 39 compute the closing balance for February which is 29,800 are you getting it 39 minus all the total payments which is 9,200. Now this 29,800 see the availability of cash has increased substantially first it was 18 then 29,800 that will become the opening balance for March. Now in the March the total available cash is 66,800 minus the payments. So the balance is now 27 you can see here the availability was already high in the beginning of March. So though the requirement of payment increase they could easily manage that without allowing the balance to go down substantially. So for April now the opening balance is 27 total is 59 payments are 34,300 so closing balance is 24,700. Now taking 24,700 the total of A and B is 57,700 actually the availability has slightly gone down but because payments have also gone down the balance in hand has increased is 33,100 take it as a opening balance. So the final closing balance is now 36,000 are you able to get it this is how cash budget is to be prepared you will realize that this is based on all earlier budgets. So you will have to make different functional budgets because those budgets involve various payments and some of them give you cash. So first other functional budgets are made and finally the cash budget is made. This budget is particularly useful for cash management and working capital management particularly in the field of finance fine. So this is known as a finance function for the company to estimate the cash position and accordingly make the availability of cash. Now this budgeting exercise becomes a very important input for financial management of the company fine. So with this we will stop here namaste dhanyava.