Interpretation and analysis of cash budgets Flashcards
What are the terms of a cash budget?
- Opening balance
- Total receipts
- Cash available
- Total payments
- Closing balance
What is opening balance?
This is the amount of cash available at the start of the month.
What is total receipts?
This refers to the total cash received during the month.
What is cash available?
This refers to the amount of cash available to spend.
This is calculated by:
opening balance + total receipts
What is total payments?
This refers to the amount of cash spent during the month.
What is closing balance?
This refers to the amount of cash available at the end of the month.
This is calculated by:
Cash available - total payments.
What are the problems of a cash budget? (learn solutions more)
- Cash sales are falling
- Purchases are increasing
- Expenses are increasing
- Negative closing balance
What is the interpretation of ‘cash sales are falling’?
This could be cause by seasonal factors such as the business selling goods suitable for summer months only.
There may also be other external factors at play, such as recession or rising interest rates.
What is the solution to ‘cash sales are falling’?
The business should engage in marketing activities, for example, lowing prices or launching promotions, such as advertising buy-one-get-one-free (BOGOF) deals to encourage custom.
What is the interpretation to ‘purchase are increasing’?
The business is tying too much money up in inventory. The goods are not selling, yet they have ordered more and more.
What is the solution to ‘purchase are increasing’?
Use just-in-time (JIT) inventory control or find a cheaper supplier.
What is the interpretation to ‘expenses are increasing’?
The business is paying increasing costs for expenses, for example rising rent costs.
What is the solution to ‘expenses are increasing’?
Switch to cheaper premises or sell online to cut rent costs dramatically.
What is the interpretation of ‘negative closing balance’?
The business had a deficit which means their payments outweigh their receipts. This leaves the business unable to pay off other debts and expenses.
What is the solution of ‘negative closing balance’?
Arrange more finance in the short term, such as another loan, overdraft or attract investment, for example, through venture capital/business angels.
