Preparation of Cash Disbursement schedule and Cash Budget

Preparation of Cash Disbursement Schedule and Cash Budget

Both the cash disbursement schedule and the cash budget are essential tools for cash flow management in any business. They help businesses ensure they have enough liquidity to meet their financial obligations while avoiding cash shortages.

Let’s break down both concepts and explain how to prepare each of them:

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1. Cash Disbursement Schedule

A cash disbursement schedule outlines the expected outflows of cash over a specific period (e.g., monthly, quarterly). It includes all the payments the business must make, such as:

• Operating expenses (e.g., rent, utilities, salaries)
• Loan repayments
• Purchase of inventory or raw materials
• Capital expenditures
• Tax payments

The schedule helps businesses plan for these outflows to ensure that there is enough cash available to meet obligations when due.

Steps to Prepare a Cash Disbursement Schedule

Step 1: Identify All Cash Outflows

Start by listing all expected cash disbursements. This includes:

• Fixed expenses: These are regular payments such as rent, utilities, insurance premiums, and salaries.
• Variable expenses: These are payments that change based on sales or activity levels, like raw materials, commissions, or advertising costs.
• Debt obligations: Include loan repayments, interest, or credit payments.
• Other disbursements: These could be taxes, dividends, or purchases of equipment or inventory.

Step 2: Determine Payment Timing

For each type of disbursement, determine the timing of the payment. Some payments will be made monthly (e.g., rent), while others may be paid quarterly, annually, or at irregular intervals.

For example:

• Rent: Paid monthly
• Loan payment: Paid quarterly
• Inventory purchase: Paid every 60 days after the order

Step 3: Calculate the Cash Outflows

Estimate the amounts of each disbursement, and then calculate the total cash outflow for each month or period.

For example:

• Salaries: ₹50,000 per month
• Raw materials purchase: ₹20,000 in February
• Loan payment: ₹15,000 quarterly (due in January)

Step 4: Prepare the Cash Disbursement Schedule

Now, organize this data in a table format, showing the timing and amount of each cash disbursement.

Example: Cash Disbursement Schedule

Month	Salaries	Rent	Raw Materials	Loan Repayment	Total Disbursements
January	₹50,000	₹10,000	₹0	₹15,000	₹75,000
February	₹50,000	₹10,000	₹20,000	₹0	₹80,000
March	₹50,000	₹10,000	₹0	₹0	₹60,000
Total	₹150,000	₹30,000	₹20,000	₹15,000	₹215,000

In this example, the business expects to spend ₹75,000 in January, ₹80,000 in February, and ₹60,000 in March.

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2. Cash Budget

A cash budget is a detailed projection of the cash inflows and outflows for a specific period. It helps a business predict cash shortages or surpluses and plan accordingly. The cash budget combines information from the cash receipt schedule and cash disbursement schedule to provide a comprehensive view of cash flow.

Steps to Prepare a Cash Budget

Step 1: Estimate Cash Inflows (From the Cash Receipt Schedule)

Start by listing all expected cash receipts (inflows) for the period. These could include:

• Cash sales
• Credit sales collected
• Loan proceeds
• Other income (e.g., interest, asset sales)

Step 2: Estimate Cash Outflows (From the Cash Disbursement Schedule)

As we discussed earlier, list all expected cash outflows (disbursements) from the cash disbursement schedule.

Step 3: Opening Cash Balance

Start with the opening cash balance at the beginning of the period (e.g., at the start of the month). This is the amount of cash the business has on hand at the beginning of the period.

Step 4: Calculate Ending Cash Balance

For each period, calculate the ending cash balance using the formula:

$$\text{Ending Cash Balance} = \text{Opening Cash Balance} + \text{Cash Inflows} - \text{Cash Outflows}$$

This ending balance becomes the opening balance for the next period.

Step 5: Review and Adjust

Once the cash budget is prepared, review it to identify potential cash shortfalls or surpluses. If you anticipate a cash shortfall, you may need to arrange financing (e.g., a loan) or adjust disbursements (e.g., delay payments).

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Example: Cash Budget

Let’s assume the following data for a business:

• Opening cash balance (January 1st): ₹20,000
• Cash receipts: ₹108,000 (as from the previous example: cash sales, credit sales collected, loan inflows)
• Cash disbursements: ₹75,000 (as from the cash disbursement schedule)

Now, let’s prepare the cash budget for January:

January Cash Budget:

Item	Amount (₹)
Opening Cash Balance	₹20,000
Cash Inflows	₹108,000
Total Cash Available	₹128,000
Cash Outflows	₹75,000
Ending Cash Balance	₹53,000

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Cash Budget Format (for Multiple Months)

Month	Opening Cash Balance	Cash Inflows	Cash Available	Cash Disbursements	Ending Cash Balance
January	₹20,000	₹108,000	₹128,000	₹75,000	₹53,000
February	₹53,000	₹30,000	₹83,000	₹80,000	₹3,000
March	₹3,000	₹12,000	₹15,000	₹60,000	-₹45,000 (shortfall)

In this example:

• January: Cash balance at the end of the month is ₹53,000.
• February: Cash inflows are ₹30,000, but cash outflows are ₹80,000, leaving a shortfall of ₹47,000. The company may need to secure additional financing (e.g., a loan).
• March: If the trend continues and there is a large outflow but insufficient inflow, the business faces a ₹45,000 shortfall.

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Why Are Cash Disbursement Schedules and Cash Budgets Important?

1. Liquidity Management: Both the cash disbursement schedule and the cash budget help businesses ensure they have sufficient cash to meet short-term obligations, thus avoiding liquidity crises.
2. Informed Decision Making: These tools help businesses plan better and make strategic decisions regarding borrowing, investing, or controlling expenses.
3. Forecasting and Planning: A good cash budget helps businesses predict cash flow problems in advance, giving them time to adjust operations, secure funding, or adjust payment schedules.
4. Cost Control: By clearly identifying outflows, businesses can pinpoint areas for cost control or negotiation, helping improve financial efficiency.

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Key Takeaways

• Cash Disbursement Schedule lists all expected cash outflows during a given period and helps businesses plan for their future payments.
• Cash Budget incorporates both cash inflows and outflows, providing a complete picture of the business’s cash position and allowing for better financial management and forecasting.
• Both tools are vital for maintaining liquidity and ensuring the business can meet its financial obligations while planning for future growth.