Cash budgets and forecasts - Preparing receipts and payments...

Learning Outcomes

After reading this article, you will be able to prepare receipts and payments schedules as part of a cash budget. You will identify and classify cash inflows and outflows by period, explain why cash flow timing differs from accruals, sequence receipts and payments based on credit terms, and calculate closing bank balances to spot possible shortages or surpluses. You will also recognise the main sources of cash flows relevant to exam questions.

ACCA Foundations in Financial Management (FFM) Syllabus

For ACCA Foundations in Financial Management (FFM), you are required to understand how organisations forecast and monitor their cash positions. In this article, focus your revision on:

• The difference between receipts (cash inflows) and payments (cash outflows)
• Preparing receipts and payments schedules as part of cash budgets
• Allocating cash movements to the correct periods based on expected payment/receipt dates
• Identifying the impact of timing differences between recorded transactions and cash flows
• Calculating cash and bank balances to highlight potential cash shortfalls or surpluses

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the key difference between receipts and income, and why must this be addressed when building a cash budget?
2. A business has credit sales of $10,000 each month and allows customers two months to pay. In which month will January’s credit sales be received as cash? a) January
   b) February
   c) March
   d) April
3. True or false? Payments for credit purchases always appear in the cash budget in the same month the related expense is recorded in the profit and loss account.
4. Name two common items found under receipts and two under payments in a typical receipts and payments schedule.

Introduction

Preparing a receipts and payments schedule is an essential step in cash budgeting. Rather than focusing on profit, a receipts and payments schedule tracks when actual cash is expected to move in or out each period (usually monthly). This projection identifies when the organisation could run short or accumulate surplus funds—allowing management to take action in advance.

Key Term: receipts and payments schedule
A table that lists all expected cash receipts (inflows) and payments (outflows) over a set of periods, showing effects on the bank balance.

RECEIPTS AND PAYMENTS SCHEDULES IN CASH BUDGETING

Distinguishing Receipts and Payments

A receipts and payments schedule separates all anticipated movements of cash:

• Receipts: Money entering the business, such as cash sales, collected receivables, proceeds from asset disposals, or new loans.
• Payments: Money leaving the business, like payments to suppliers, payroll, utilities, rent, tax, or equipment purchases.

Key Term: receipts
All amounts of actual cash received by the entity in a period, regardless of when the related income was earned.

Key Term: payments
All amounts of actual cash spent by the entity in a period, regardless of when the related expense is incurred.

Understanding Timing Differences

Not all transactions create immediate cash movements. For example, sales made on credit appear as income in the profit statement but cause cash inflows only when the customer later pays. The same applies to credit purchases, where goods are received in one period, but payment is made in a future period.

Key Term: timing difference
The gap between when a transaction is recorded for profit purposes and when the cash actually moves in or out.

Laying Out Your Schedule

Receipts and payments schedules are presented as columns (one for each period) and rows (one for each type of cash inflow or outflow). A typical layout is:

• For each period: Opening balance + Total receipts – Total payments = Closing balance.
• The closing balance then becomes the opening balance for the next period.

Projecting Receipts: Applying Credit Terms

Businesses must carefully schedule receipts from credit customers. For example, if credit terms state "two months to pay," sales made in January will only bring in cash in March.

Projecting Payments: Applying Payment Terms

Likewise, credit purchases made in a given month are paid for when due. If you purchase goods in February on one-month credit, the cash leaves the business in March.

Worked Example 1.1

A retailer anticipates the following (per month for January–March):

• Cash sales: $2,200 each month
• Credit sales: $5,000 each month (customers pay after two months)
• Credit purchases: $3,500 each month (paid after one month)
• Overheads: $1,300 per month, paid when incurred
• Opening bank balance on 1 January: $2,800

Prepare a receipts and payments schedule for January through March.

Answer:
Receipts:

• January: $2,200 (cash sales)
• February: $2,200 (cash sales)
• March: $2,200 (cash sales) +$5,000 (January credit sales collected) = $7,200 Payments:
• January: $1,300 (overheads); no purchase payments because December purchases data not given—assume zero for this period.
• February: $1,300 (overheads) +$3,500 (January purchases)
• March: $1,300 (overheads) +$3,500 (February purchases) Schedule:

  	Jan	Feb	Mar
  Opening bank	2,800	x	y
  Receipts	2,200	2,200	7,200
  Payments	1,300	4,800	4,800
  Closing bank	3,700	y	z
  Calculations:

• Jan closing: 2,800 + 2,200 – 1,300 = 3,700
• Feb closing: 3,700 + 2,200 – 4,800 = 1,100
• Mar closing: 1,100 + 7,200 – 4,800 = 3,500

Working with Receipts: Example of Credit Terms

If sales of $6,000 are made each month on two months’ credit, when will cash for February’s sales be received?

Worked Example 1.2

A company makes $6,000 of credit sales every month. Customers pay two months after the sale. What are cash receipts from credit sales in May?

Answer:
Receipts in May are collections on March credit sales: $6,000.

Interpreting the Closing Bank Balance

The closing balance in your schedule shows whether the business will have enough cash to meet planned payments. Negative numbers signal a potential cash shortfall.

Worked Example 1.3

In Example 1.1 above, suppose the March closing bank balance is negative. What could management do to prevent financial problems?

Answer:
They could arrange extra finance (e.g., overdraft or short-term loan), speed up collections from customers, defer payments to suppliers where possible, or postpone non-essential expenditures.

Monitoring and Acting on Cash Forecasts

Regular updates of receipts and payments schedules allow a business to see cash crunches or excesses in advance, and plan appropriate funding or investment decisions.

Exam Warning

Always base receipts and payments schedules on actual cash movements, not on when profit or expenses are recorded. Confusing profit timing with cash flow timing leads to incorrect budgeting.

Revision Tip

When calculating schedules in an exam, construct a timeline for each key receipt and payment type. Mark when each item will result in a cash movement before filling values into your table.

Summary

Receipts and payments schedules form the backbone of accurate cash budgeting. By assigning each cash inflow and outflow to its proper period, these schedules provide advance warning of possible liquidity shortfalls or surpluses and allow proactive planning.

Key Point Checklist

This article has covered the following key knowledge points:

• Prepare receipts and payments schedules using period columns and clear breakdowns of inflows and outflows
• Allocate cash movements strictly to periods when money is received or paid, not when income or expense is recorded
• Recognise the main sources of cash receipts and payments for use in exam scenarios
• Explain timing differences between accrual-based accounting and cash movements
• Use projected closing balances to identify periods of potential cash deficits or surpluses

Key Terms and Concepts

• receipts and payments schedule
• receipts
• payments
• timing difference