Cash budgets and budgeted cash position in QCE Accounting Unit 3
“Prepare a cash budget for a trading GST business that forecasts cash receipts and payments, calculates the budgeted closing bank balance, and informs decisions about managing liquidity”
A cash budget is a forecast, not a record of what happened. It is built only from cash movements, so non-cash items such as depreciation and the bad debts expense never appear. Receipts come from cash sales and from collecting accounts receivable, which arrive in a later month according to the collection pattern. Payments cover cash purchases, payments to accounts payable, expenses, asset purchases, drawings and the net GST remitted to the ATO. The format is: opening bank balance, add total receipts, less total payments, equals closing bank balance, which becomes next month's opening balance. A negative closing balance signals a forecast bank overdraft, prompting action before the period begins.
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What this dot point is asking
QCAA wants you to forecast the cash position of a trading GST business before the period happens. A cash budget lists expected cash receipts and expected cash payments month by month, then works out the budgeted closing bank balance. The point is planning: a business that can see a shortfall coming can arrange an overdraft or delay a purchase, and a business that can see a surplus can plan to invest it or pay down debt. You must handle the timing of credit sale collections, the timing of payments, and the cash effect of remitting GST to the ATO.
What goes in a cash budget
A cash budget records only cash flowing in and out of the bank account. That single rule decides what is included and what is excluded.
Cash receipts typically include:
- Cash sales (received in the month of sale, including the GST collected).
- Collections from accounts receivable (received in the month the credit customer pays, which follows the collection pattern).
- Other cash inflows such as a capital contribution, a loan received, or GST refunds.
Cash payments typically include:
- Cash purchases of inventory (including GST paid).
- Payments to accounts payable for earlier credit purchases.
- Cash expenses such as wages, rent and advertising.
- Purchase of non-current assets.
- Drawings by the owner.
- The net GST remitted to the ATO for the previous period.
Never included: depreciation, bad debts expense, doubtful debts adjustments, discount expense and any other accrual or non-cash item. These affect profit but not the bank account.
Timing is the hard part
The skill QCAA tests most is timing. A credit sale made in March that the customer pays in April is an April receipt, not a March one. If 60 percent of credit sales are collected in the month after sale and 40 percent two months after, you must trace each month's credit sales forward into the correct collection months. The same logic applies to paying accounts payable: a credit purchase is a payment in the month the business actually pays the supplier.
GST also moves on a timing basis. The GST collected on sales and GST paid on purchases accumulate in GST Clearing during the period, but the cash effect on the budget is the single net remittance to the ATO, recorded in the month the business actually pays it.
Reading the result
The closing bank balance is the headline figure. A healthy positive balance shows the business can meet its commitments. A negative closing balance is a forecast overdraft: the business is predicted to run out of cash. Because the budget is prepared in advance, management can respond by arranging finance, deferring discretionary spending, accelerating collections from receivables, or negotiating longer terms with suppliers. This forward planning is the entire purpose of the instrument and is where interpretation marks are earned.
The data
Coastal Supplies forecasts for April and May. Opening bank balance at 1 April is $3,200 (favourable). Sales are 50 percent cash and 50 percent credit; all figures include GST. Credit customers pay in full in the month after sale. Forecast total sales (GST inclusive): March $22,000, April $26,400, May $30,800.
Payments forecast: payments to accounts payable $14,000 (April) and $16,000 (May); cash expenses $6,000 each month; GST net remittance of $1,300 due in April; new equipment $4,400 (GST inclusive) in May.
Receipts
Cash sales are half of each month's sales. Credit collections arrive the following month.
| Receipts | April | May |
|---|---|---|
| Cash sales (50%) | 13,200 | 15,400 |
| Collections from receivables (prior month credit 50%) | 11,000 | 13,200 |
| Total receipts | 24,200 | 28,600 |
April collections come from March credit sales (22,000 x 50% = 11,000). May collections come from April credit sales (26,400 x 50% = 13,200).
Payments
| Payments | April | May |
|---|---|---|
| Payments to accounts payable | 14,000 | 16,000 |
| Cash expenses | 6,000 | 6,000 |
| GST remitted to ATO | 1,300 | 0 |
| Equipment purchase | 0 | 4,400 |
| Total payments | 21,300 | 26,400 |
Closing position
| Summary | April | May |
|---|---|---|
| Opening bank balance | 3,200 | 6,100 |
| Add total receipts | 24,200 | 28,600 |
| Less total payments | (21,300) | (26,400) |
| Closing bank balance | 6,100 | 8,300 |
April closing balance of $6,100 becomes May's opening balance. Both months end with a positive bank balance, so no overdraft is forecast and the surplus could fund the equipment without external finance.
- Putting depreciation or bad debts in the budget
- These are non-cash. A cash budget only ever shows money moving through the bank.
- Recording credit sales as receipts in the month of sale
- Credit sales become receipts only when the customer pays, following the collection pattern.
- Carrying the wrong opening balance
- Each month's opening balance must equal the previous month's closing balance, not the original starting figure.
- Forgetting GST inside the cash figures
- Receipts and payments are the GST-inclusive amounts that actually hit the bank, and the net GST remittance is its own separate payment line.
Exam-style questions
Questions in the style of QCAA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
Practice6 marksPrepare a cash budget for Delta Trading for the month of August. Opening bank balance at 1 August is $4,800 (favourable). All sales include GST and are 40 percent cash, 60 percent credit; credit customers pay in full in the month after sale. Sales (GST inclusive): July $25,000, August $30,000. Payments in August: accounts payable $13,200, cash expenses $7,500, GST remitted to the ATO $1,900. Determine the budgeted closing bank balance and state whether an overdraft is forecast.Show worked answer →
A 6 mark cash budget needs receipts, payments and the closing balance built from cash movements only.
Receipts. Cash sales are 40 percent of August sales: . Collections come from July credit sales (paid in August): . Total receipts .
Payments. Accounts payable , cash expenses , GST remitted . Total payments .
Closing balance. Opening receipts payments favourable. No overdraft is forecast.
Markers reward separating cash from credit receipts, collecting the prior month credit sales in the correct month, totalling only cash payments, and the correct closing balance with a liquidity statement.
Practice4 marksA cash budget for Reef Supplies forecasts a closing bank balance of negative $2,300 at the end of September. Explain what this figure means and recommend two actions management could take before September begins to address it. Justify each recommendation.Show worked answer →
A 4 mark response needs interpretation plus two justified actions.
Meaning. A negative closing balance of is a forecast bank overdraft: the business is predicted to pay out more cash than it has available, so it cannot meet its commitments from its own funds in September.
Actions (any two, justified). Arrange an overdraft facility or short-term loan before September so the shortfall is covered without dishonoured payments. Defer discretionary spending such as a planned asset purchase to a later month with a surplus. Accelerate collections by offering a settlement discount to credit customers so receipts arrive sooner. Negotiate longer payment terms with suppliers so payments fall in a stronger month.
Markers reward correctly identifying the overdraft, and two practical actions each tied to its effect on the forecast cash position.