Cash Budget analysis

Cash Budget Cash budget is: a forecast of estimated cash receipts estimated cash payments and the resultant cash position for a certain period of time

Form of control Helps to control the business by: Planning – budgets are prepared and targets are set for the overall business. This enables the business to work towards a definite goal and allows management to look ahead and be ready for challenging conditions. Supervision – decisions will be made to ensure that the targets will be achieved and that policies laid down will be followed. Evaluation – actual figures are compared with budgeted figures to see how closely performance matched estimated performance.

Reasons to prepare a cash budget The budget will enable management to see when its commitments are due and make sure that money is available at that time. The budget will reveal periods when the business has excess funds. Excess money can be invested to earn interest. The budget can reveal weaknesses in the business’s debt collection policy. If it is found that the average collection period for an accounts receivable to pay is three months and the normal terms of credit are 30 days, steps will have to be taken to improve this.

Reasons to prepare a cash budget cont.… Adjustments for seasonal fluctuations can be made. Seasonal fluctuations in sales mean that in some businesses a large amount of money is received in one part of the year and very little in another part of the year. The budget reveals those periods when shortages of funds may occur. Some firms rely on borrowed funds (such as bank overdrafts) to finance their activities. Cash budgets are an important form of control over the business. The setting of targets is important so that employees can work within these constraints.

Summary See when commitments are due Reveal periods of excess funds Weaknesses in debt collection policy Adjustments for seasonal fluctuations Reveal when shortages of funds may occur Form of control over the business