Budgeting Flashcards
Explain the purpose of budgeting
Budgets are prepared in order to help the business PLAN and PREPARE for what is PREDICTED to happen in the FUTURE. This allows the owner to take ADVANTAGE of any OPPORTUNITIES or prepare for any THREATS. Budgets can then be COMPARED to the actual performance to identify areas of error where CORRECTIVE ACTION needs to be taken
Define the Budgeted CFS and why is it prepared
A report that shows all EXPECTED future cash INFLOWS and OUTFLOWS, the actual bank balance for the start of the period and the expected bank balance for the end of the period. It is prepared to help the owner assess the firms ability to meet obligations throughout the period (Liquidity).
Give 5 examples of Operating inflows
- Cash Sales
- Receipts from A/C Receivable
- GST Received
- GST Refund
- Unearned sales revenue
Give 5 examples of Operating outflows
- GST Paid
- Payments to A/C Payable
- Payments for expenses (Wages, Advertising)
- GST Settlement
- Prepaid Expenses
Why should BNCFOA be positive
The business should be able to generate sufficient cash from its day to day trading activities to meet ongoing obligations and fund the investing and financing activities
How can the business attempt to generate more cash inflows if the owner identifies poor BNCFOA (4)
- Decrease the selling price to increase sales volume
- Improving the customer service to attract customers
- Manage accounts receivable better by promptly invoicing
- Offer discounts for early account settlements
How can the business attempt to reduce cash outflows if the owner identifies poor BNCFOA (4)
- Defer payments to accounts payable until a later date
- Reduce cash paid on expenses by finding cheaper suppliers or changing procedures
- Changing staff rosters to prevent wasted wages
- Moving to a cheaper premises
What can the business do if the budget predicts a net decrease in cash position (4)
- Make additional capital contributions
- Negotiate a bank overdraft
- Attempt to cut bank on non-essential expenses (prepayment for expenses)
- Defer the purchase of a NCA or lease the NCA
What can the business do if the budget predicts a net increase in cash position (4)
- Increase the drawings
- Expand areas of the business
- Settle A/C Payable earlier to receive discount
- Reduce existing debts to decreases the amount of interest
Define the Budgeted IS and why is it prepared
A report that shows all the expected future REVENUES and EXPENSES, as well as the expected gross and net profit. It is prepared to assess the the trading performance and how well the business is able to generate a profit for the period
Give 5 examples of Cash Inflows that AREN’T Revenues
- GST Received
- GST refund
- Loan received
- Sale of NCA
- Capital Contribution
Give 5 examples of Cash Outflows that AREN’T Expenses
- GST Paid
- GST Settlement
- Loan repayment
- Purchase of NCA
- Drawings
Give 3 examples of Revenues that AREN’T Cash Inflows
- Inventory Gain
- Discount Revenue
- Profit on disposal of a NCA
Give 4 examples of Expenses that AREN’T Cash Outflows
- Inventory Loss
- Discount Expense
- Loss on disposal of a NCA
- Inventory Write Down
Define the Budgeted Balance Sheet and why is it prepared
A report that attempts to PREDICT the firms ASSETS, LIABILITIES and owners equity. It allows the owner to prepare for the replacement of NCA’s as well as determine the level of drawings and loan repayments for the period upcoming.
