Cash Basis Accounting: Using Your Checkbook to Budget - dummies

Cash Basis Accounting: Using Your Checkbook to Budget

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

On a very basic level, your cash budget is a reflection of your checkbook. It’s the sum of the deposits you make (revenue) and the checks you write (costs). The budgeting result of cash basis accounting is a cash budget.

Such a budget assumes that all your customers pay for sales in cash during the month of sale and that you pay all costs during the month that the goods are sold. This scenario is highly unlikely for most businesses.

It’s more likely that you write a check in February for materials for a product you sell in April. Similarly, you may pay an employee in December for work to make a product that’s sold in January.

Assume you own a shop that sells greeting cards, flowers, and gifts. Your beginning cash balance for the month is $100,000.

Gift Shop Cash Budget — Month of March
Beginning cash balance $100,000
Add customer payments for sales $50,000
Inventory purchases $20,000
Payroll costs $10,000
Utilities costs $1,000
Lease cost $3,000
Ending cash balance $116,000

This cash budget has a $16,000 increase in cash during the month ($116,000 – $100,000). You had $50,000 in sales. If you hadn’t collected any cash from customers during March, your cash balance would decrease by $34,000, the total of all the cash outflows. If that happened, you’d start the next month with $34,000 less cash.

You need to consider whether your April cash budget (next month) would work with a lower beginning balance in cash. You don’t want to start in the red.

If you don’t think you’ll have enough cash for a period, you can consider how to get it.

The cash budget is similar to the statement of cash flows. The following table shows an example statement of cash flows for the gift shop.

Gift Shop Budgeted Statement of Cash Flows
Beginning cash balance $100,000
Cash flow from operations $16,000
Cash flow from financing $0
Cash flow from investing $0
Ending cash balance $116,000

Note that the beginning and ending cash balances agree with the cash budget ($100,000 at the beginning and $116,000 at the end). The cash flow calculation from operations is

Net cash inflow from operations = Customer payments – Cash outflows

Net cash inflow from operations = $50,000 – $34,000

Net cash inflow from operations = $16,000

All the cash flows for the gift shop are related to day-to-day operations. None of the cash activity is related to financing or investing.