11) UNIT 2 - Cash Flow Management

Question 1

Describe 5 purposes/benefits of cash budgets

Answer 1

• monitor and control - provides business with a tool for comparison of budgets with actual results
• measure performance - of the department as a whole or individuals
• set targets/limits for managers to work towards
• to highlight anticipated periods of poor cash flow (deficits) - provides time for corrective action
• to highlight anticipated periods of surplus - enable organisation to invest for the future

Question 2

describe 6 common causes for cash-flow problems and a solution for ecah

Answer 2

1)•Overstocking - Spending too much money on stock that has not been sold, meaning there is no money to buy other essentials
(buy stock just in time)

2) Low sales/not receiving enough money from sales of goods and services
(put prices up or low cost advertising)

3) owners taking too much money out of the business for personal use
(reduce amount taken out of business)

4) giving customers too long to pay back money, don’t have immediate money for essentials
(30 days max)

5) not having enough time to pay bills from their suppliers
(negotiate loner payment periods or get new supplier)

6) bad management decision e.g. high marketing decision that does not generate higher sales
(training)

Question 3

describe 6 actions that can be used to overcome cash flow problems

Answer 3

• reconsider expenses- can anything be cut back, cheaper suppliers, are all employees necessary
• spread expensive payments out by hire purchase or leasing
• increase sales revenue by increasing prices or advertising
• offer discount to customers who pay on time as this will encourage them to pay quickly
• sell assets that are no longer needed to fund other areas of the business e.g. machinery, premises
• reduce the level of trade credit given to customers (60 days to 30 days)

Question 4

list why management uses cash budgets

Answer 4

• Planning
• Organise
• Command
• Co-ordinate
• Control
• Delegate
• Motivate

Question 5

explain how management use cash budgets in:

planning

Answer 5

• Look ahead and set aims and strategies
• This means, they can see where cash is being spent and where it is being earned, so can plan for deficits (corrective action) and investment of surplus

Question 6

explain how management use cash budgets in:

organising

Answer 6

• Make arrangements for all resources of the organisation to be available at the right time in the right quantities
• This means that management must see if they are able to afford these resources (bulk purchases, trade credits)

Question 7

explain how management use cash budgets in:

commanding

Answer 7

• management tell department(s) what their duties are

* this means that they must inform them what their limits of expenditure are for efficient running of the organisation

Question 8

explain how management use cash budgets in:

co-ordinating

Answer 8

• management make sure everyone is working towards the same aim
• financial reports allow management to keep a clear overview of the organisation.
• e.g. Cash budgets will let the management invest one departments surplus to recover deficits in another department

Question 9

explain how management use cash budgets in:

delegating

Answer 9

•management can delegate responsibilities for holding, recording and spending departmental budgets

Question 10

explain how management use cash budgets in:

motivating

Answer 10

•Delegating budgets increases motivation because staff feel trusted and enpowered