Cash Budgets 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 performances of individual departments and divisions.
Highlights periods where cash flow problems may occur.
Used to secure borrowing/show to potential investors.
To give departments/managers a budget/target to focus on.
What are the impacts 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 is opening balance?
The amount of cash available at the start of the month.
What is total receipts?
The total cash received during the month.
What is cash available?
The amount of cash available to spend.
Calculated by opening balance + total receipts.
What is total payments?
The total amount of cash spent during the month.
What is closing balance?
The amount of cash available at the end of the month.
Calculated by cash available - total payments.
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 for having too much money tied up in inventory?
Use just-in-time inventory control.
Sell off excess inventory e.g. through a sale.
What is the solution for having too many credit sales?
Offer cash discounts to encourage customers to pay in cash?
What is the solution for the payments period for credit sales being too long?
Charge higher interest on credit sales to encourage customers to pay sooner.
What is the solution for not having enough credit purchases?
Switch suppliers to those with interest-free credit available on purchases.
What is the solution for 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 for 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 for having too many drawings by owners?
Charge higher interest on drawings to discourage owners from withdrawing money from the business.
What is the solution for not having enough sales revenue?
Adapt the marketing mix to encourage more sales e.g. lower prices.
What is the solution for having too many unpaid debts?
Sell debts to debt factoring companies.
What are the terms that appear in a cash budget?
Opening balance
Total receipts
Cash available
Total payments
Closing balance
What is opening balance?
The amount of cash available at the start of the month.
What is total receipts?
The total cash received during the month.
What is cash available?
The amount of cash available to spend.
Calculated by: opening balance + total receipts.
What is total payments?
The total amount of cash spent during the month.
What is closing balance?
The amount of cash available at the end of the month.
Calculated by: cash available - total payments
