Contingency Budget Example, Definition And Why It’s Necessary.

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Contingency budgeting is a respond to the reality that it’s humanly impossible to predict the future with consistent accuracy. Budget estimates will be wrong sometimes; therefore it’s wise to put alternative courses of action on standby in case original estimates are little bit off the mark.

Contingency budgets prepare a business to react quickly and accurately to changes in the operating environment of the business. A business that uses contingency budgets to react in the most appropriate manner to the unexpected is usually rewarded.

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Contingency budgets should be important appendices to primary budget estimates, to help navigate a business through changes in a business climate and ease the shift from one level of activity to another.

And the flexibility they offer saves time, money and stops the business from making costly mistakes. The flexibility indicates to the business areas it can gear down and where it can’t.

Primary budgets of all departments and units of a business should have their relevant contingency budgets. They should be presented :

  1. On a higher-than-expected level of business activity,
  • On a lower-than-expected level of business activity and,
  • On the expected level of activity.

An example:

Month               January  February       March 
Three-tiered budgetLow ($)Expected($)High($)Low($)Expected($)High($)Low($)Expected($)High($)
Balance from previous month50,000100,000150,00030,00075,000120,00040,00085,000130,000
Add: Cash receipts.30,00030,00030,00070,00080,00090,00080,00090,000100,000
Total cash available80,000130,000180,000100,000155,000210,000120,000175,000230,000
Less: Cash payments (disbursements)50,00055,00060,00060,00070,00080,00080,00090,00095,000
Balance carried to appropriate tier of next month.30,00075,000120,00040,00085,000130,00040,00085,000135,000
Table 1.0: Contingency Cash Budget.
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Cash receipts include:

  1. Receipts from debtors (accounts receivable collection),
  2. Dividends received,
  3. Sales of stock
  4. Sales of capital items,
  5. Loans received,
  6. Interest received,
  7. Any other cash receipts.

Cash payments (disbursements) include:

  1. Payments To creditors ,
  2. Cash purchases,
  3. Wages and salaries,
  4. Overhead,
  5. Loan repayments,
  6. Dividends,
  7. Taxation
  8. Any other cash disbursements.

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