Cash Budgets

Question 1

What is a cash budget?

Answer 1

This 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 each month represents how much money we think we will have at the end of each month. It allows owners/managers to improve their decision making and plan ahead.

Question 3

What are advantages of preparing a cash budget?

Answer 3

To forecast and plan ahead (e.g. to estimate how much money will be coming in, to estimate how much money will be going out)
To aid decision making (e.g. can they afford to purchase a new non-current asset or should they use hire purchase or lease the asset?)

Question 4

How can a business solve cash flow problems?

Answer 4

Reduce costs e.g. less spent on advertising
Increase selling price
Increase sales units (quantity sold) e.g. have promotions
Find a cheaper supplier- benefit from discounts
Raise extra equity- invest more equity/take on a new partner/issue shares