Accounting Analysis: Depreciation And Cash Flow

Cash Budgets vs Traditional Budgeting Cash budgets account for the actual flow of cash in and out of the off-premise catering business. How do cash budgets differ from budgets for income and expenses? The answer is simple: Budgets for income and expenses do not account for cash flow. They simply record revenues and expenses, and do not take into account when the actual cash is received. For example, income from a catered event is recorded on the day the event occurs. However, for the same catered event, cash flow could be different. Let's assume that an off-premise caterer books a party for March 15, and that the total price for the event is $1,000. This particular caterer requires a $250 deposit, which is received on January 15, $250 is paid on February 15, and the balance is paid on the day of the event. In this situation, cash is received during 3 months of the year, yet the sale (revenue) is not recorded until March 15. This is one way in which cash flow differs from basic budgeting. A second way occurs on the expense side, when off-premise caterers purchase food and supplies on credit, and do not need to pay for these items until the tenth of the following month. In the above example, let's suppose that the food and supplies necessary to buy for the event were $250 at cost; however, this caterer need not pay for them until the tenth of the following month. What about payroll costs? They are generally paid within one week of the party date, and although they do have some effect on cash flow, their effect is minimal in terms of this discussion. Other factors separate income and expense budgets from cash budgets, for example, prepaid expenses such as insurance and utility deposits. In the insurance situation, many off-premise caterers finance their insurance premiums by paying anywhere from one-quarter to one-half of the policy in advance, and financing the remainder over a 6- to 10-month period. In the case of a $3,000 insurance policy, which will show on the records as a monthly expense of $250 - during each of the 12 months of operation ($3,000 divided by 12 months), the actual cash flow could be as follows:. On January 1 an off-premise caterer pays a $1,000 deposit toward an annual insurance policy and finances the remaining balance of $2,000 over the following 10 months. (Please assume that the $3,000 policy cost includes interest charges for the financed portion of the policy.) Please realize that the income and expense budget would simply show an expense of $250 per month for all 12 months of the year. Another major difference between cash and revenue budgeting occurs with the purchase of major equipment and fixtures. In the hypothetical example of startup costs, this off-premise caterer needed $50,000 in equipment and fixtures to get started. For cash budgeting purposes, let us assume that half of this amount was paid in advance, and the remaining balance was financed over three years. In this case, the cash flow statement would show outward cash flow of $25,000 in January, and equal amounts of outward cash flow during the next 36 months for the remaining $25,000 that was financed plus interest charges. However, the income and expense budget would show different figures equal to the amounts that can be depreciated under federal and state laws. (Off-premise caterers should definitely obtain professional advice from a certified public accountant and their attorney regarding this very technical accounting and legal aspect of the business.) Let us assume that the laws allow this off-premise caterer to depreciate this equipment over a five-year period (60 months). There-fore, the monthly depreciations charge would be equal to $50,000 divided by 60 months which equals $833.33 per month. Startup off-premise caterers must project their cash flows annually, with the first year of operations being, of course, the most important. In the preceding example, where first-year sales are expected to be $100,000 let us determine the cash needs for this business using a basic cash budget system which projects cash receipts and payments on a monthly basis: Cash receipts include: • Cash sales • Collection of accounts receivable • Advance deposits of future parties Cash payments include: • Food purchases (cost of goods sold) • Payroll and related expenses • Direct operating expenses • Administrative and general expenses • Owner draw (amount owner takes from business) • Prepaid expenses (insurance) • Startup costs