Cash Budgets Flashcards
What is a cash budget?
A cash budget forecasts how much money the business thinks will be coming in each month and going out each month in the course of the year ahead. The final figure at the end of each month represents how much money the business forecasts it will have left (closing balance).
What is the purpose of a cash budget?
It helps to predict cash income and outgoings.
It helps to control costs and spending.
It helps to plan for large future purchases e.g. purchase of new machine.
It helps to set targets for individual departments.
How does a business generate cash?
Selling products/services
Receiving a bank loan/grant
Issuing shares (for Ltds only)
Selling a non-current asset it no longer needs (e.g. delivery van or property)
What do businesses spend cash on?
Purchasing raw materials from supplier (purchases).
Paying staff wages.
Paying utility bills (e.g. electricity, internet).
Paying insurance.
Paying rent/mortgage.
Advertising costs.
Causes of cash flow problems
Cash sales and credit sales are decreasing due to demand falling for products/services.
Electricity costs are increasing due to an increase in charges from utility supplier.
Purchase costs are increasing due to suppliers increasing the prices of raw materials or goods.
Bank charges due to late loan/overdraft payments.
Solutions to cash flow problems
Launch an advertising campaign to remind customers about your product and encourage them to buy it.
Switch utility supplier to find a better deal.
Negotiate with supplier for a better deal for raw materials (or switch to a cheaper supplier).
Having a meeting with the bank to discuss charges and arrange a payment plan.
