Budget questions. (wordy)

[Thomas Bushnell BSG]

Chris Shoemaker <c.shoemaker at cox.net> writes:

> A cash budget is probably what you think of when you think "budget".

Hah.  I think of both. :)

> Google can provide formal definitions if you like, but your intuition
> is probably good enough.  Note: I didn't use the term "expense budget".
> Thomas did, and I don't know exactly what that means, but he's right
> that there's more than one type.  

I use a modified accrual method for my own finances, which is
essentially a cash-basis accounting with particular transaction types
counted on an accrual basis.  I have some assets which are not
cashable nor fixed, for example, my prepaid starbucks card, multi-ride
rail tickets, and the like, for which the purchase of the asset is not
recorded as an expense, but as an asset transfer, and then I only
count the expense as I spend down the balance on the card or use up
the multi-ride tickets.

My expense budget simply counts all the expense accounts in my
bookkeeping; it is convenient to use exactly the same budgeting
categories as I have expense accounts.  More complicated organizations
do not normally treat budgeting categories and accounts so closely.
The expense budget (really it's an income/expense budget) predicts my
expenses.  Paying the car payment is an asset/liability transfer and
an income expense payment; the expense budget only counts the latter
of course, because only the latter is an expense.  The expense budget
(since it's really an income/expense budget) also predicts income for
the year, which again is arranged just the way my income accounts are.

I count my tuition waivers as income, and the tuition for which they
pay as an expense.  This is more sensible for me, because I get the
waiver if and only if I work as a TA that term, which doesn't happen
every term.

The cash budget is then a different beast.  I could do it ground up,
but instead it cribs figures from the expense budget.  This works well
because I am a simple case.  So I consider annual cash credits and
debits.  My cash debits are my total income plus any loans I plan to
take out.  (Strictly speaking, if I receive income which is
noncashable, and I don't expend it that year [a starbucks card, which
I receive as a gift on Dec. 25, for example], I should also subtract
from cash debits, but the amount of these are negligible in my case.)
My cash credits are my expenses, minus those expenses which are not
paid from cash assets (for example, depreciation on the car,
capitalized student load interest, and so forth), plus additional cash
payments (debt retirement, asset transfers).

The cash budget tells me a net cash flow for the year, which has no
necessary relation to the net gain/loss for the year.  I can then
budget cash month-to-month.  I track the exact month my income and
cashable loans come in, because they are quite irregular (being a
student and all), but I make the simplifying assumption that the cash
credits are paid out one twelfth in each month.  I can then know what
my projected cash balance is at the beginning and end of each month.
Some months will end with a negative cash balance; in those months my
credit card balance will be higher than my cash in the bank.  This
system lets me know at a glance how much credit I will need to have
available at which times, which is convenient.

Consider my auto loan.  I have an asset: the car.  I depreciate the
car (never mind how I do it; it's nothing like the IRS rules, but it
suits me).  Each time I depreciate the car, that's an expense from the
fixed asset account to the car purchase expense account.

I have a liability: the auto loan.  Note that once the loan is set up,
there is no futher relation between the accounting for the car and for
the loan.  Each month I make a car payment; most of that retires the
loan, and is a transfer from cash to the auto loan liability.  Some is
interest, which is an expense.

The annual expense budget does not see the debt retirement at all,
because it is simply not an expense.  I estimate the total interest I
will be paying that year (no need for it to be exact, so I don't
bother with careful precision) and enter that on the expense budget.

For purposes of tracking cash, however, I certainly had better keep
track of the debt retirement portion too!  That's why I have a cash
budget.  So the cash credits section of the cash budget starts off
with "total expenses", and then adds to it "auto loan debt
retirement".  This number is simply the total annual car payment my
bank expects (I know this exactly) minus my expected interest payment.
Note that errors in the expected interest payment, do not affect the
cash picture at all; if I predict too much interest expense, I will
predict correspondingly less debt retirement, and the sum of the two
will remain constant.

Thomas