The Cash Budget (Accounting) PDF

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Accounting and Finance for International Managers:

The Cash Budget: Aims of a Business: -

Maximise shareholders wealth – long term. Manage risks (appropriate financial structure) – medium term. Maintaince adequate working capital and cash (liquidity) – short term.

Background to Cash Budget: What is a Budget? -

It is a plan to manage future business activities. Cash budget (cash flow forecast) involves predicting future cash inflows and outflows.

Why do Businesses Need Cash? -

Businesses must be ‘going concern’. A ‘going concern’ is a business that has a long-term future and can meet all its commitments. If a business cannot meet all its commitments, then it will become insolvent as known as ‘a gone concern’. Cash is needed to meet business commitments so without cash a business will fail.

Managing Cash: -

It is important that business have enough cash always of the year although, this will vary depending on the type of business. Businesses must not have too much cash because it will become wasteful. Cash doesn’t earn income.

Mechanics of Cash Budgets: -

Break period down into monthly columns. Identify cash receipts (cash inflows) according to the sources and total the receipt for each month. Identify cash payments (cash outflows) according to the purpose and the total of payments per month. Work out the net cash receipts/ cash payments of the months.

Cash Balance Calculations: Net Receipts/ Payments = Total Receipts – Total Payments Closing Balance = Opening Balance + Net Receipts/ Payments Cash Budgeting: Cash Sales: -

Amount of cash sales is entered in cash budget in month of sale.

Credit Sales:

Accounting and Finance for International Managers: -

From your knowledge of the business and from credit terms estimate the likely payment pattern of customers. Calculate what proportion of sales will be collected for each month following each sale. Estimate the level of bad debts and exclude these. Enter the expected income into the relevant months on the cash budget.

Implications of Cash Shortage: Inability to Meet Obligations: -

Loss of Reputation/ Bankruptcy

Need for Immediate Borrowing: -

Unplanned Overdraf Higher Cost of Borrowing Higher Cost Per Product Lower Profits Pressures to Increase Selling Price

Actions to Increase Cash: -

Delay capital expenditure on non-current assets.

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Negotiate an overdraf facility/short term loan.

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Collect debts from customers more quickly.

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Cut expenses/overheads.

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Sell non-current assets that are being under used.

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Buying less inventory/stock – improve stock control.

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Delay payment to suppliers.

Cash Budget Summary: -

Cash budgeting is an essential planning instrument for all organisations. Cash budgeting only deals with ‘receipts’ and ‘payments. Cash budgeting will identify the strengths and weaknesses of organisations. Cash budgeting enables decisions to be made to tackle future problems that are identified from a cash budget....