Cash budgets

Question 1

What is a cash budget ?

Answer 1

A financial statement which forecasts how much money we think will be coming in each month and going out each month in the course of the months ahead.

Question 2

What do you call the money coming in each month ?

Answer 2

Receipts.

Question 3

What do you call the money going out each month ?

Answer 3

Payments.

Question 4

What are the two categories of sales?

Answer 4

Cash sales and credit sales.

Question 5

What are cash sales?

Answer 5

The goods sold to the customer which the customer has paid for at the time. (doesn’t have to be cash)

Question 6

What are credit sales?

Answer 6

The goods sold to the customer but they will be pay for them at a later date.

Question 7

What are cash purchases ?

Answer 7

Cash purchases are paid for in the month of purchase.

Question 8

What are credit purchases?

Answer 8

Credit purchases will be paid for one month or two months later depending on what the question tells you.

Question 9

What does a negative balance indicate ?

Answer 9

More money has gone out the business than has come in.

Question 10

What are the two main reasons a business may prepare cash budgets?

Answer 10

To forecast and plan ahead

To aid decision making.

Question 11

What does forecast and plan ahead mean?

Answer 11

To estimate how much money will be coming in.
To estimate how much money will be going out.
To estimate how much money will be left at the end of each month.

Question 12

What does aid decision making mean?

Answer 12

To know weather they can afford to purchase a new non-current asset or they should hire purchase or lease the asset.

To know whether they need to arrange a bank overdraft in advance(if they have a negative closing balance)

To know whether they need to arrange a bank loan(if they have many months with a high negative closing balances)

Question 13

What is a cash flow problem?

Answer 13

Not enough money coming in the business compared to going out of the firm. (This can arise even if the firm is successful.)

Question 14

How do you improve cash flow problems?

Answer 14

reduce costs eg less spent on advertising
increase selling price
increase sales units (quantity sold) eg have promotions
find a cheaper supplier-benefits from discounts
raise extra equity- invest more equity/take on a new partner/issue shares
arrange a loan
arrange an overdraft in advance
tighter credit control-collect money owing from Trade Receivables more quickly
spread the purchase of non-current assets costs by using hire purchases.