Cash Budgeting - Cash flow problems and solutions Flashcards
What is the purpose of budgeting?
- To predict a positive cash-flow situation (surplus)
- To predict a negative cash-flow situation (deficit)
- To allow investment to be planned during a surplus
- To allow action to be taken to avoid a deficit
- To be compared with actual figures and used to measure the performance of individual departments or divisions.
What are the advantages of budgeting?
- Highlights periods where cash flow problems may occur
- Used to secure borrowing/show to potential investors
- To give department/managers a budget/target to focus on.
What is the impact of poor cash flow?
- Inability to pay suppliers
- Unable to pay expenses
- May have to go into administration
- Lack of disposable funds to invest in things like technology.
What are cash-flow problems?
- Too much money tied up in inventory
- Too many credit sales
- Too long a payment period for credit sales
- Not enough credit purchases
- High amounts of spending on non-current assets
- Increasing expense costs
- Too many drawings by owners
- Not enough sales revenue
- Too many unpaid debts
What is the solution to “Too much money tied up in inventory”?
- Use just-in-time (JIT) inventory control
- Sell off excess inventory, e.g. through a ‘sale’
What is the solution to “Too many credit sales”?
Offer cash discounts to encourage customers to pay in cash.
What is the solution to “Too long a payment period for credit sales”
Charge higher interest on credit sales to encourage customers to pay sooner.
What is the solution to “not enough credit purchases”?
Switch suppliers to those with interest-free credit available on purchases.
What is the solution to “High amounts of spending on non-current assets”?
Pay for non-current assets in instalments, such as paying for a vehicle using hire purchase.
What is the solution to “increasing expense costs”?
Look for ways to reduce expenses, e.g. spend less on rent by selling online through e-commerce.
What is the solution to “too many drawings by owners”?
Chare higher interest on drawings to discourage owners from withdrawing money from the business.
What is the solution to “not enough sales revenue”?
Adapt the marketing mix to encourage more sales, e.g. lower prices.
What is the solution to “too many unpaid debts”?
Sells debts to det factoring companies.
