Cash flow forecast and budgeting (04)

Question 1

SUMMARY

Answer 1

In summary, the following are covered in this topic:
1. Cash flow relates to the timing of payment commitments and receipts from
customers. Forecasting cash flow refers to estimating future cash inflows and
cash outflows, usually on a month-by-month basis.
2. Cash flow forecast helps businesses, especially start-ups, to monitor cash flow
and apply for funding.
3. Cash flow forecast is limited by the lack of accuracy, unexpected events,
personal bias, competitors’ actions and interest rates movement.
4. Budgeting is a financial planning process that enables the management to make
an informed estimate about its financial needs for its future planned activities
(usually one year).
5. A budget is a detailed, financial plan for a future time period.
6. Budgeting enables businesses to allocate scarce resources, provides direction
for the business, promotes coordination between departments, and allows
management to track its progress and corrective actions.
7. The limitation of budgeting includes being time consuming, inflexible, leads to
unnecessary spending, focuses on the short-term, and results in quality issues.
8. Variance is the difference between the budgeted and actual figures. It is either
favourable or adverse.
9. Variance analysis is an important budgetary control technique as it prompts
management to find the root cause of the variance, to take corrective action
and to plan for more accurate future budgets.