cash budgets purpose, problems and solutions

Question 1

what are the purposes of budgeting

Answer 1

● 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 or divisions.

-helps to highlight where cash flow problems may occur

-used to secure borrowing/can be shown to potential investors

-to give departments/managers a budget/target to focus on - motivate employees

Question 2

solution to too much money tied up in inventory

Answer 2

Use just-in-time (JIT) inventory control

Sell off excess inventory, e.g. through a ‘sale’.

Question 3

solution to too many credit sales

Answer 3

Offer cash discounts to encourage customers to pay in cash.

Question 4

solution to too long a payment period for credit sales

Answer 4

Charge higher interest on credit sales to encourage customers to pay sooner.

Question 5

solution to not enough credit purchases

Answer 5

Switch suppliers to those with interest-free credit available on purchases.

Question 6

solution to high amounts of spending on non-current assets

Answer 6

Pay for non-current assets in instalments, such as paying for a vehicle using hire purchase.

Question 7

solution to increasing expense costs

Answer 7

Look for ways to reduce expenses, e.g. spend less on rent by selling online through e-commerce.

Question 8

solution to too many drawings by
owners

Answer 8

Charge higher interest on drawings to discourage owners from withdrawing money from the business.

Question 9

solution to not enough sales revenue

Answer 9

Adapt the marketing mix to encourage more sales, e.g. lower prices.

Question 10

solution to too many unpaid debts

Answer 10

Sell debts to debt factoring companies.

Question 11

what are some impacts of cash flow problems

Answer 11

-unable to pay suppliers meaning stock is not delivered and production stops

-may need to find a cheaper supplier which may reduce the quality of products

-costs may increase due to interest on any extra funds borrowed

-no money to invest in future growth

-owner may need to reduce their drawings

-may have to offer discounts to increase sales

-unable to pay expenses

-may need to sell unused assets or make staff redundant