When cost accounting, cash basis accounting posts revenue and expenses to the financial statements based solely on cash transactions. Nothing happens until you take cash in or send it out. It’s a simple way of doing things — no accounts receivable and no accounts payable.
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 it assumes that you pay all costs during the month that the goods are sold. This is very 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 might pay an employee in December for work to make a product that’s sold in January.
Assume you own a gift shop that sells greeting cards, flowers, and gifts. Your beginning cash balance for the month is $100,000. This table displays a cash budget for a gift shop.
| Amount | |
|---|---|
| Beginning cash balance | $100,000 |
| Add customer payments for sales | $50,000 |
| Less: | |
| 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 if 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. This table shows an example statement of cash flows for the gift shop.
| Amount | |
|---|---|
| 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 and 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.
