cash budget

Topics: Budget, Cash flow, Cash Pages: 15 (2719 words) Published: November 24, 2014
Introduction to budget
A budget is a financial plan for business, prepared in advance. It is defined by cima as ‘a plan expressed in money’.

Cash flow forecasting is the process of estimating cash inflows and cash outflows over a period of time, usually for a period of 1 year. Cash Budget is the process of estimating cash inflows and cash outflows over a period of time, usually prepared monthly. Cash flows is the amount of money flowing into and out of a business over a period of time. Cash inflows are the receipts of cash, typically arising from sales of items, payment of debtors, loan received, rent charged, sale of assets and interest received. Cash outflows are payment of cash, typically arising from the purchase of items, payment to creditors, loans repaid or given, rental payment, purchase of assets and interest payments. Net Cash flow is the sum of cash inflows to an organisation minus the sum of cash outflows over a period of time. Cash outflows normally take place before cash inflows. Typically a business’s cash outflow will follow these stages: Purchase of Material = Cash Outflow

Transformation of inputs into outputs = Cash Outflow.
Sale of outputs = Cash inflow
It can be seen that there is tendency for cash to flow out of a business before it flows back in. This means that a typical business might suffer cash flow problems. Techniques used to forecast the Cash Flow

Previous cash flow forecasts
Consumer research
Study of similar businesses, such as competitors
Research into the level of resources needed
Banks and consultant
Problems in forecasting cash inflows and outflows
Changes in the economy and consumer tastes
Inaccurate market research
Actions of competitors

Why business forecast Cash flow
The main reason for forecasting the cash flow is to:
Identify potential cash-flow problems in advance
It provides a means of controlling expenditure and therefore cash flow. Guide the firm towards appropriate action by high lighting potential problems Make sure that there is sufficient cash available to make any necessary payments Provide evidence in support of financial assistance (such as bank overdraft) Avoid the possibility of the company being forced out of business (into liquidation) Identify the possibility of holding too much cash.

It provides clear targets for all staff and therefore improves the likelihood of achieving objectives. Causes of Cash Flow Problems
It can arise because of:
Seasonal demand, leading to low cash inflows at certain times of the year Overtrading – firms buy lots of extra materials and become short of cash Over – investment in fixed assets, draining the company cash Credit sales, which may lead to a lack of cash until the credit period is over Poor stock management, tying up cash in excessive stock levels Paying suppliers too quickly, which can leave a business short of cash Unforeseen changes, such as machinery breakdown, which may reduce cash holdings Ways of improving cash flow

Cash flow can be improved by using:
a bank overdraft
a short term loan
factoring
selling surplus assets
sale and lease back
improving the credit collection policy
Increase the credit payment period
Reducing the unnecessary stock levels.

Reasons how it is possible to make a profit but still have an overdraft Timing differences Because accounts are prepared on an accruals basis, profits are realised when the sales invoice is raised

However cash is not received until the debtors (trade receivables) pay. Therefore it is possible to make a profit but not to have received the cash. Prepaid expenses will be deducted from the expense (thus increasing the profit) however the full amount will have been paid thus reducing the cash balance Other Payments are made that are not recorded in the profit and loss account e.g. loan repayment. Capital expenditure as opposed to revenue expenditure

Purchase of fixed assets (non-current assets)
Repayment of loans
Dividends...
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