F Cash budgeting

Question 1

Purpose of cash budgets (in aid to decision making)

Answer 1

• Can use to plan and set aims and strategies. Problems will be anticipated and solved before happening.
• Allows management to organise resources so they are in the right place at the right time with the right quantities.
• Management can use cash budgets to command departments to manage their budgets effectively.
• Can use cash budgets to see the finances of specific departments and the organisation as a whole, to see if everyone is operating for the business’s best interest
• Allows management to control the spending of the organisation
• Managers will delegate responsibilities over the budgets such as spending and recording to different departments
• The delegation of responsibilities motivates and empowers employees

Question 2

Describe a cash budget

Answer 2

A statement which includes future anticipated spending and receipts. Helps the organise anticipate the cash flow of the organisations future.

Question 3

What can a cash budget highlight?

Answer 3

It highlights potential shortages or surpluses

Question 4

What indicates poor cash flow?

Answer 4

When closing balance is decreasing or going into the minus.

Question 5

What to do if there is a surplus of cash?

Answer 5

Invest in the business, eg new technology or equipment

Question 6

Causes of cash flow problems

Answer 6

• Overstocking, too much cash tied up in stock
• Low sales, means low sales revenue
• Increasing business expenses
• Owners taking too many drawings out of the business or dividends are too high
• Offering too much credit to customers, and having too long of a payback term
• Taking out large loans with high interest

Question 7

Solutions to cash flow problems

Answer 7

• Negotiating better deals with suppliers, or finding a new supplier
• Increasing sales by increasing promotion
• Increasing sales revenue by increasing prices
• Sell assets to generate income
• Issue more shares
• Reduce drawings or dividends