Unit 3 Finance - Cash Budgets Flashcards
What is a cash budget?
A cash budget shows the expected inflows and outflows of cash over a specific period, helping businesses manage their finances effectively.
List three reasons for creating a cash budget.
- Identify surplus or deficit -
- Highlight periods of high expenses or income
- Avoid cash flow problems
- Get loan mortgage from bank (evidence of adequate funds)
- Compare actual vs planned budgets and adjust accordingly
- Support decision making
What can a surplus in a cash budget be used for?
- Spend more on material
- Develop the business
- Buy assets
What should a business do if there is a deficit in the cash budget?
- Identify cash flow problems and solve them
- Decide whether more finance is required
How does a cash budget support decision-making?
It helps compare actual vs planned budgets, adjust plans accordingly, and provides evidence for loans/mortgages.
List three causes of cash flow problems.
- Overstocking - too much finance tied up in stock
- Increased expenses
- Delayed customer payments
- Too many employees
- Increase in wages/ minimum wage
- Deficit
- Owner’s drawings too high
- Low sales
What are some external causes of cash flow problems?
1) Seasonal/weather changes 2) Sudden increase in demand 3) Unreliable supplier trade credit
List three solutions to cash flow problems.
- Cut down staff overtime or bonuses
- Find cheaper suppliers or energy providers
- Encourage early customer payments
- Cheaper suppliers of stock and energy
- Sell unnecessary assets
- Apply for loan/overdraft
How can marketing help solve cash flow problems?
New marketing/promotional campaigns can increase sales, leading to higher revenue and income.
What are the key parts of a cash budget?
- Opening balance
- Receipts (money coming in) - Payments (money going out) -
- Closing balance
What is the opening balance in a cash budget?
The amount of money available at the beginning of the month, equal to the previous month’s closing balance.
What are receipts in a cash budget?
A list of all money coming into the business, such as sales or rent received.
What are payments in a cash budget?
A list of all money expected to go out, such as rent, wages, or electricity.
What is the closing balance in a cash budget?
The remaining cash at the end of the month after payments have been subtracted from receipts.
How can analyzing a cash budget benefit a business?
- Identifies times of potential shortages or surpluses
- Helps regulate expenses
- Improves decision-making
