Unit 1 - Budgets Flashcards
What are the 5 main types of budgets you could encounter?
- Cash Budgets
- Sales Budgets
- Productions Budgets
- Capital expenditure Budgets
- Budgeted financial statements
Simply put, why are budgets essential to businesses?
Budgeting is an essential business strategy, the essentially look towards future commitments and are therefore very useful for management decision making.
What is a cash budget, and why is it important for business planning and strategic decision-making?
A cash budget is a valuable tool for managing a business’s cash flow. Prepared monthly and often covering several months, it forecasts cash inflows, outflows, and the closing bank balance, helping businesses anticipate cash flow fluctuations. It’s essential for strategic decision-making, especially when large capital expenditures are involved, as it enables management to plan for additional funding needs and determine if borrowing will be required for new projects.
What is a sales budget, and how does it benefit a business?
A sales budget helps businesses plan for future income and seasonal sales variations. While it only shows forecasted sales, it aids in planning production, staffing, and cash flow. It also helps set sales targets and can serve as a basis for staff bonuses or incentives.
What is a production budget, and why is it important for manufacturing firms?
A production budget is crucial for manufacturing firms to plan production around seasonal sales changes or large orders. It determines the raw materials needed, especially if sourcing from overseas, which may require months of advance planning. This budget helps the business estimate all production-related costs.
What is a capital expenditure budget, and why is it important for long-term planning?
A capital expenditure budget helps businesses plan for long-term, high-cost investments, like building extensions, vehicle purchases, or new machinery. It’s essential for careful planning on how to fund these large expenditures.
What are budgeted financial statements, and why are they important for long-term planning?
Budgeted financial statements show the expected financial performance and financial position of a business at some point in the future.
Budgeted income statements help businesses plan towards future profit levels. These budgets can then be compared with actual results as a way of monitoring business performance.
A budgeted statement of financial position helps a business forecast future levels of assets and liabilities. This is helpful when looking at possible future debut levels and planning for targeted debt reduction.
Why do we compare budgets with the actual results?
Budgets are a plan for what we think will happen in the future. That’s why it is important to compare with what actually happens in the future to identify overspending or other variances. This can help inform future budgets so that they become as accurate as possible.
What is cash from accounts receivable? and why is it important to estimate it?
Many businesses sell gods or provide services on credit. This means it is essential to those businesses to estimate when they will receive the cash from credit customers (customers wont always pay within specified credit terms)
