Cash Budget

Question 1

Cash Flow

Answer 1

Cash is generated by a business through the sale of goods or provision of a service. It is important that businesses have enough cash to:
- pay employees
- buy supplies
- cover business expenses
Cash flow is all the money that comes into and goes out of a business.
There must be more cash coming into the business than there is going out to avoid the company going into
liquidation. This would mean they are no longer able to trade.

Question 2

Reasons cash flow problems may occur

Answer 2

• low sales
• too much money tied up in stock
• customers taking too long to pay their bills
• suppliers not allowing creditor a limited credit period
• owner taking too much money out the business, this is also known
  as drawings over-investment
• in new assets such as machinery or equipment
• an increase in expenses

Question 3

Impact of Cash Flow Problems

Answer 3

• unable to pay suppliers meaning stock is not delivered and
  production stops
• may need to find a cheaper supplier which may reduce the quality
  of products
• costs may increase due to interest on any extra funds borrowed
• no money to invest in future growth
• owner may need to reduce their drawings
• may have to offer discounts to increase sales
• unable to pay expenses
• may need to sell unused assets or make staff redundant

Question 4

Solving Cash Flow Problems
Solution - Find a cheaper supplier

Answer 4

Justification - This will reduce the cost of purchases meaning more cash available from each sale

Question 5

Solving Cash Flow Problems
Solution - Lease machinery or equipment

Answer 5

Justification - This allows a business to spread the cost of the purchase over many months

Question 6

Solving Cash Flow Problems
Solution - Sell any assets that are not being used effectively

Answer 6

Justification - This will release cash that can be used elsewhere in the business

Question 7

Solving Cash Flow Problems
Solution - Apply for a loan or overdraft from the bank

Answer 7

Justification - This will help to cover immediate cash flow problems but will need to be paid back over time with interest

Question 8

Solving Cash Flow Problems
Solution - Offer discounts to customers for paying up front or paying for goods quickly

Answer 8

Justification - This will encourage customers to pay quickly and reduce the number of people who owe the business money

Question 9

Solving Cash Flow Problems
Solution - Arrange extra time to pay bills from supplier (increase credit terms)

Answer 9

Justification - This will give the business time to raise the cash needed to pay bills

Question 10

Solving Cash Flow Problems
Solution - Increase advertising or sales promotion

Answer 10

Justification - This will increase sales meaning more cash coming into the business

Question 11

Cash Budgets

Answer 11

A document produced to help a business manage their cash flow.
A cash budget is prepared in advance and shows all the planned monthly cash incomings (receipts) and any planned cash outgoings (payments).

Question 12

Benefits of Cash Budgets

Answer 12

• It can identify any times where there may be a shortage of cash.
  This will allow the business to plan ahead and arrange extra funding
  such as a bank overdraft.
• It can help to regulate expenses. Any months where expenses are
  high will be highlighted by a cash budget.
• It will clearly show where a business has more cash than expected
  (surplus) or less cash than expected (deficit). This will allow a
  business to plan more effectively and make better decisions.
• It can be used to show potential lenders or investors. This can help
  to secure investment in the business.
• It can be used to set targets or budgets for individual departments.
  This may motivate employees as they have goals to achieve.

Question 13

Opening Balance
(cash budgets)

Answer 13

This is the amount of money you have available at the beginning of the month. It is the same amount as the closing balance from the month before.
Eg, in the table above the opening balance for February is £2, 500. This is the same as the closing balance for January.

Question 14

Receipts
(cash budgets)

Answer 14

This is a list of all the money coming into the business such as sales or rent received.
Eg, in the table above the receipts for January are £3,000.

Question 15

Payments
(cash budgets)

Answer 15

This is a list of all money you expect to go out of your business such as rent, wages or electricity.
Eg, in the table above the payments for March are £4,300.

Question 16

Closing Balance
(cash budgets)

Answer 16

This is the cash left at the end of the month after all payments have been taken away from the business receipts.
Eg, in the table above the closing balance for March is -£100. This is a negative number as more money has gone out than has come in.