Purposes of a Cash Budget

Question 1

What is the purpose of a Cash Budget

Answer 1

To predict the future movements of cash received and paid and change in bank balance over a period of time for the (insert name of the Business here).
Merit

It highlights areas of financial concern and allows the (user name) time to make decisions about the financial arrangements needed to ensure there is enough cash available to continue to run the business into the foreseeable future. Eg get a new loan, reduce expenses, increase income.

Question 2

What are the components of a Cash Budget

Answer 2

• Cash Receipts for period
• Cash Payments for period
• Net increase/decrease in cash for period
• Opening bank balance
• Closing bank balance

Question 3

What is a limitation of a Cash Budget

Answer 3

Does not show any planned credit transactions. E.g. credit sales, credit purchases
Does not include estimated non-cash items. E.g. bad debts, depreciation

Does not show estimated owners drawings of goods from the firm

The figures are estimates - not based on past financial and non financial information, they may not free from bias by those preparing them.

The future is not able to be predicted with complete confidence as unexpected changes may occur e.g. Natural Disasters. This could effect the accuracy of the figures estimated