cash budgets

Question 1

what is a cash budget?

Answer 1

it is a financial statement which forecasts how much money we think will be coming in each month (receipts) and how much money we think will be going out each month (payments) in the course of the months ahead. The final figure represents how much money we think we will have at the end of each month.

Question 2

what does a cash budget allow owners/managers to do?

Answer 2

It allows them to improve their decision making and plan ahead.

Question 3

what are the two categories of sale?

Answer 3

Cash sale and Credit sale

Question 4

describe a cash sale

Answer 4

cash sales refers to goods sold to the customer which the customer has paid for at the time ( doesn’t have to be by cash) Cash sales are included in the receipts

Question 5

describe a credit sale

Answer 5

Credit sales are goods sold to the customer but they will pay for them at a later date eg one month later.

Question 6

describe a cash purchase.

Answer 6

Cash purchases will be paid for in the month of the purchase

Question 7

describe a credit purchase

Answer 7

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

Question 8

outline the two main reasons why businesses prepare cash budgets

Answer 8

• to forecast and plan ahead
• to aid decision making
• to estimate how much money will be left at the end of each month
• to decide if they need to arrange a bank loan

Question 9

What are cash flow problems?

Answer 9

A business experiences cash flow problems when there is not enough money coming in compared to going out. This can arise if the firm is successful and is selling a lot of goods. Cash flow problems happen as a result of credit customers not paying for their goods at the time.

Question 10

how can cash flow problems be improved?

Answer 10

• reduce costs eg advertising
• increase selling price
• find a cheaper supplier - benefit from discounts
• arrange a loan
• tighter credit control - collect money from owing trade receivables more quickly

Question 11

disadvantages of methods to improve cash flow problems

Answer 11

– increasing the selling price may drive customers to competition
- borrowing money will increase costs eg bank interest
- reducing advertising may result in lower sales units