ACCT5996 Chap.4 Master Budgets and Cash Planning
Master Budgets and Cash Planning
A master budget translates plans into connected operating and financial schedules. This chapter follows sales assumptions into production, material purchases, cash receipts, cash payments and financing.
It separates accrual results from liquidity, applies inventory policies to the correct future period, and evaluates participation, slack and short-term behaviour as part of the budgeting process.
The schedules are treated as a dependency network.
Sales or a binding resource constraint sets the operating path; inventory policies shift requirements across periods; collection and payment patterns convert accrual amounts into cash timing; and the minimum-cash policy determines financing. Each balance is labelled by date so that one period's ending amount becomes the next period's beginning amount.
The chapter also tests assumptions for feasibility and behaviour, because a balanced spreadsheet can still rely on impossible capacity, hidden slack or a harmful short-term response.
What this chapter covers
- 01
Budget purposes and strategic planning
- 02
Sales and production dependencies
- 03
Finished-goods and material inventory policies
- 04
Cash collection and supplier payment schedules
- 05
Cash budget and minimum cash policy
- 06
Accrual profit versus cash timing
- 07
Participation, slack and behavioural consequences
Worked example · free
Build production and material purchases schedules
- +1January desired finished goods are 15% of 5,400, giving 810 units.
- +1January production is 4,800 plus 810 minus 720, giving 4,890 units.
- +1January production needs 4,890 times eight, giving 39,120 metres; desired ending timber is 10% of 5,490 times eight, giving 4,392 metres.
- +1January purchases are 39,120 plus 4,392 minus 3,800, giving 39,712 metres.
Key terms
- Master budget
- The coordinated set of operating and financial schedules for a planning period.
- Sales budget
- The forecast of sales volume and revenue that often begins the budget sequence.
- Production budget
- The output required to meet sales and the finished-goods inventory policy.
- Cash budget
- A schedule of opening cash, receipts, payments, financing and closing cash.
- Budgetary slack
- Deliberate understatement of revenue or overstatement of cost to make a target easier.
- Collection pattern
- The timing percentages that convert credit sales into expected cash receipts.
- Minimum cash
- The lowest cash balance management plans to maintain through financing or other action.
Master Budgets and Cash Planning FAQ
Why does the sales budget come first?
Expected demand usually drives production, resources and cash. If a scarce resource constrains output, that operational constraint may instead lead the planning sequence and cap feasible sales.
Why can a profitable month need borrowing?
Revenue may be earned before customers pay, while purchases, wages and other cash commitments fall due earlier. Accrual profit and liquidity therefore move on different schedules and require separate controls.
How should depreciation enter the cash budget?
Depreciation affects accounting profit but is not a current cash payment. Remove it from operating expense when converting the expense schedule into current-period cash outflows.
How can participation create slack?
Local managers contribute useful knowledge and commitment but may protect themselves with easier assumptions. Transparent driver evidence and review of contingencies can challenge slack without removing participation.
What is the best control for an inventory schedule?
Reconcile the whole horizon, not only each monthly formula. Total production should equal total sales plus the change in finished-goods inventory, while total material purchases should equal material used plus the change in material inventory. Label balances by date and confirm that every ending balance rolls into the next opening balance. These controls expose shifted months and duplicated inventory adjustments.
How should a cash shortfall be evaluated?
Locate when the balance first falls below the minimum and identify which collection, purchase, expense or capital assumption causes it. Test operational responses such as collection timing, supplier terms or inventory reduction before selecting borrowing. Then state the loan timing, interest treatment, repayment rule and operational cost of each alternative, because preserving cash can damage capacity or customer service.
Exam move
Draw the dependency order before calculating. Label beginning and ending inventories by month, and use the following period when a policy refers to future needs. Build collection and payment schedules separately before the cash summary. Reconcile opening cash plus inflows minus outflows plus financing to closing cash, then run a sensitivity on the assumption most likely to create a shortage.
Use a timeline for every percentage pattern and prove that collectible or payable fractions sum to the intended total. Distinguish cash from expense by marking depreciation, prepayments, accruals, asset purchases and loan flows separately. After the base budget balances, change one driver at a time and explain which linked schedules must be recomputed rather than editing only the closing cash figure.
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