Budgeting and Cash Budgets WACE Year 12 Accounting and Finance
“Explain the purpose and benefits of budgeting, prepare a cash budget showing receipts, payments and closing balance, and use budget variances and internal controls to monitor performance”
A budget is a formal financial plan for a future period. A cash budget forecasts cash receipts and cash payments to project the closing cash balance, warning managers of shortfalls or surpluses in advance. Comparing actual results with the budget produces variances: favourable when results are better than planned, unfavourable when worse. Internal controls protect the cash that budgets plan around.
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What this dot point is asking
SCSA wants you to explain why businesses budget, prepare a cash budget with a running balance, interpret variances, and link budgeting to internal control over cash.
The purpose and benefits of budgeting
A budget is a quantified financial plan for a defined future period. It expresses management's expectations for income, costs, cash flows and resources, and becomes the benchmark against which actual performance is later measured.
Benefits include forcing managers to plan ahead, coordinating different parts of the business, setting targets that motivate staff, allocating resources, and providing a benchmark for control.
Preparing a cash budget
A cash budget records only cash movements in the period they occur. Credit sales appear when customers are expected to pay, not when the sale is made. Non-cash items such as depreciation never appear in a cash budget because no cash changes hands.
A cash budget lists:
- Cash receipts (cash sales, collections from debtors, capital introduced, loans)
- Cash payments (payments to creditors, wages, expenses, asset purchases, loan repayments)
- Net cash flow (receipts less payments)
- Opening balance, then closing balance carried to the next period
Variances and control
A variance is the difference between a budgeted figure and the actual result. A favourable variance means the outcome was better than budget (higher income or lower cost); an unfavourable variance means it was worse. Managers investigate significant variances to take corrective action.
Internal control over cash
Because cash is easily misappropriated, businesses use internal controls such as dividing duties so no one person handles a transaction end to end, banking receipts daily and intact, paying by authorised methods, and reconciling the bank statement regularly. A cash budget supports control by flagging when balances stray from plan.
Acting on what the cash budget reveals
The value of a cash budget is in the decisions it enables before a problem arrives. A forecast shortfall lets management arrange an overdraft, delay a discretionary purchase, accelerate collections from debtors, or negotiate longer terms with suppliers, all in advance rather than in a crisis. A forecast surplus is just as useful: idle cash earns little, so the business might repay debt early, invest short term, or bring forward a planned asset purchase. Because the closing balance of one period becomes the opening balance of the next, the budget shows the trajectory of cash, not just a single snapshot, which is why a shrinking surplus across consecutive months is an early warning even while the balance is still positive. The cash budget is a planning tool first and a control benchmark second: once the period passes, actual cash is compared against it to produce variances that feed into the next plan.
Marlow Ltd opens July with $5 000 cash. Forecast July receipts are cash sales $20 000 plus debtor collections $12 000, total $32 000. July payments are creditors $18 000, wages $8 000 and rent $3 000, total $29 000.
July net cash flow is . Closing balance is .
August opens with $8 000. Receipts are $30 000 and payments are $34 000, a net outflow of $4 000. Closing balance is . The budget warns that the surplus is shrinking, so management may delay a planned asset purchase to keep a safe buffer.
Timing: the heart of a cash budget
The skill a cash budget tests is timing. A sale made in one month may be collected in the next, or split across several months under a credit policy, so the receipt appears in the cash budget when the cash actually arrives, not when the sale is recorded. The same applies to payments: goods bought on credit are paid for when the supplier's terms fall due. A common exam scenario gives a collection pattern (for example 60 per cent in the month of sale and 40 per cent the following month) and asks you to phase the receipts accordingly. Getting this timing right is what separates a cash budget from an Income Statement. The running balance then carries from one period to the next, so an error in one month's timing flows through every later closing balance, which is why careful phasing of receipts and payments earns the marks.
A classic error is to list depreciation as a payment in the cash budget. Depreciation is a non-cash allocation of an asset's cost, so no cash leaves the business. It belongs in the Income Statement, never in the cash budget. Only actual cash inflows and outflows appear.
Exam-style questions
Questions in the style of SCSA 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.
WACE 2021-style8 marksPrepare a cash budget for July and August for Renn Ltd. July: opening cash $6 000; cash sales $25 000; collections from debtors $14 000; payments to creditors $20 000; wages $9 000; rent $4 000. August: cash sales $28 000; collections from debtors $16 000; payments to creditors $22 000; wages $9 000; rent $4 000; equipment purchase $12 000. Show net cash flow and closing balance for each month.Show worked answer →
An 8 mark response needs receipts, payments, net cash flow and a running closing balance for both months.
July. Receipts . Payments . Net cash flow . Closing balance .
August. Opening . Receipts . Payments . Net cash flow . Closing balance .
Markers reward correct classification of receipts and payments, the equipment purchase included as an August payment, accurate net flows, and the July closing balance carried as the August opening balance.
WACE 2023-style5 marksExplain three benefits a business gains from preparing a cash budget, and explain why depreciation never appears in one.Show worked answer →
A 5 mark response needs three benefits and the depreciation point.
Benefits. First, it warns of cash shortfalls in advance, so the business can arrange finance or delay spending before it runs short. Second, it identifies surpluses that could be invested or used to repay debt rather than sitting idle. Third, it coordinates the timing of receipts and payments and provides a benchmark against which actual cash can later be compared.
Depreciation. A cash budget records only cash movements. Depreciation is a non-cash allocation of an asset's cost; no cash changes hands when it is recorded, because the cash left earlier when the asset was bought. It therefore belongs in the budgeted Income Statement, never in the cash budget. Markers reward three distinct benefits and the non-cash explanation for excluding depreciation.