Cash Budget and master budgets

Question 1

Reasons to Hold Cash

3 motives

Answer 1

• Transactions Motive
• Precautionary Motive
• Speculative Motive

Question 2

Cash Budgets and Cash Requirements

• Good ____ ______________ requires _____ ___________
• Need to know when to ________ and when to ______ (or invest)
• A cash _________ allows for forward planning

Answer 2

• Good Cash Management requires good planning
• Need to know when to borrow and when to bank (or invest)
• A cash budget allows for forward planning

Question 3

Example

Explain what is going on in this picture

Answer 3

• A company may have constant Cash Outflows
• But its cash inflows might be undulating (cyclical) or erratic
• With a cash budget both surpluses and deficits can be identified in advance and planned for

Question 4

Cash Budgeting Example

Lar-la plc is a manufacturer of Christmas Trees.

The following table shows Lar-la Plc’s sales predictions for the next 6 months

One third of sales in any month are paid for in the month of delivery, with the remainder paid after one months credit.

Answer 4

Costs:

• Materials are expected to cost £50,000 in August and September and £55,000 thereafter.
• Wages are normally £20,000 a month, however in the run up to Christmas overtime means that October is expected to be 10% higher than normal, November 25%, December 50%. In January the Wage bill will be 10% higher as we pay overtime to store unsold trees in long term storage.
• Rent is expected to remain constant at £10,000 a month. Incidental (Other) expenses normally are about £10,000, however in October and January these will be 10% higher and in November 10% lower.
• During October an old machine will need to be replaced costing £100,000. In the November edition of a tabloid newspaper the business intends to take out a large advertisement cost £50,000. In January a £150,000 tax bill will need to be paid.

At the beginning of August the Cash Balance was +£50,000. The sales in July was £90,000.