Cash Budgets Flashcards
- What is a Cash Budget?
A cash budget is a plan that directs cash inflows and outflows for a specific period, helping track the cash position. It’s usually prepared for short periods like monthly or weekly.
- Why is a Cash Budget Important?
A cash budget is important because it helps
predictcash shortages,
identifies excess cash for investment,
tracks payment due dates,
reveals fund imbalances,
highlights debt collection issues,
adjusts for seasonal changes,
and controls business operations.
A cash budget is important because it helps to:
- Predict cash shortages
- Identify excess cash for investment
- Track payment due dates
- Reveal fund imbalances
- Highlight debt collection issues
- Adjust for seasonal changes
- Control business operations
You can summarize it as “Predict, Identify, Track, Reveal, Highlight, Adjust, Control.”
- What are the Three Sections of a Cash Budget?
Receipts = Inflows (cash sales, collections, loans, starting cash)
Payments = Outflows (expenses, creditor payments, loans, asset purchases)
Surplus/Shortage = Difference between inflows and outflows (determines surplus or shortage)
You can think of it as:
Receipts: What comes in
Payments: What goes out
Surplus/Shortage: The result (balance)
- What Items Are Excluded from a Cash Budget?
Depreciation
Opportunity costs
Provision for bad debts/credit losses
Any other non-cash income or expenses
- What Are the Methods for Preparing a Cash Budget?
The method for preparing a cash budget is the Receipts and Payments Method, which:
- Considers all expected cash receipts and payments during the budget period.
- Excludes non-cash adjustments, such as accruals and depreciation.
- Why Are Budgets Prepared?
Budgets are prepared to:
- Plan annual operations.
- Coordinate departmental activities towards organizational goals.
- Communicate plans to managers and departments.
- Motivate managers and workers to achieve targets.
- Control activities and monitor progress.
- Evaluate managerial and employee performance.
Plan operations.
Coordinate activities towards goals.
Communicate plans to teams.
Motivate people to hit targets.
Control progress.
Evaluate performance.
- How Can Surplus and Shortage Be Managed?
Surplus cash can be invested to earn interest.
Surplus and shortage can be managed by:
- Surplus cash: Investing it to earn interest.
- Cash shortage: Making funding arrangements, such as loans or overdrafts, to ensure sufficient liquidity.
- How Often Is a Cash Budget Prepared?
A cash budget is generally projected for the next 12 months and is usually prepared on a quarterly basis (every 3 months).
