Cash budgets

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Cash budgets

  1. 1. Cash Budgets A cash budget is a forecast of estimated cash receipts, estimated cash payments and the resultant cash position for a certain period of time. Cash Budgets
  2. 2. Cash Budgets <ul><li>Income Statement </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Statement of Cash Flow </li></ul>Past events
  3. 3. Cash Budgets <ul><li>Budgets </li></ul>Future events
  4. 4. Why are cash budgets prepared? <ul><li>Assists with the identification of when commitments are due </li></ul><ul><ul><li>Ensures money is available at that time </li></ul></ul><ul><ul><li>Important business able to meet commitments as they fall due </li></ul></ul><ul><ul><li>If debts are not paid on time poor reputation will affect credit rating of business </li></ul></ul>Cash Budgets
  5. 5. Cash Budgets <ul><li>Reveals periods of excess funds </li></ul><ul><ul><li>Business should avoid idle funds left in bank accounts </li></ul></ul><ul><ul><li>Low interest returns on these accounts </li></ul></ul><ul><ul><li>Identifying such periods allows scheduling of investments into short-term money markets, fixed deposits, government securities etc </li></ul></ul>
  6. 6. Cash Budgets <ul><li>Reveals weaknesses in business ’ s debt collection policy </li></ul><ul><ul><li>Average collection period for accounts receivable to pay is 3 months </li></ul></ul><ul><ul><li>Normal terms of credit are 30 days </li></ul></ul><ul><ul><li>Steps can be taken to improve credit collection </li></ul></ul>
  7. 7. Cash Budgets <ul><li>Adjustments for seasonal fluctuations can be made </li></ul><ul><ul><li>Some businesses experience high/low sales in certain parts of the year </li></ul></ul><ul><ul><ul><li>Tourism </li></ul></ul></ul><ul><ul><ul><li>Farming </li></ul></ul></ul><ul><ul><ul><li>Department stores </li></ul></ul></ul>
  8. 8. Cash Budgets <ul><li>Budget reveals periods when shortages of funds may occur </li></ul><ul><ul><li>These periods can be identified ahead of time </li></ul></ul><ul><ul><li>Arrangements can be made with banks to meet shortfalls – bank overdraft </li></ul></ul><ul><ul><li>Steps may be made to avoid these shortages or to repay overdrafts asap to avoid high levels of interest repayments. </li></ul></ul><ul><ul><li>Cash budgets are often demanded by banks when business seek application for loan </li></ul></ul><ul><ul><ul><li>Used to identify if business is capable of meeting repayments </li></ul></ul></ul>
  9. 9. Cash Budgets <ul><li>Budgets are a form of control </li></ul><ul><ul><li>Targets set assist with the monitoring of employee work </li></ul></ul><ul><ul><li>Investigations into the difference between actual and budgeted figures should reveal why differences have occurred </li></ul></ul><ul><ul><li>Steps can be taken to correct practice </li></ul></ul>
  10. 10. Cash Budgets Types of budgets <ul><li>Short term (1 month – 1 year) </li></ul><ul><ul><li>Sales budgets </li></ul></ul><ul><ul><li>Production budgets </li></ul></ul><ul><ul><li>Cash budgets </li></ul></ul>
  11. 11. Cash Budgets <ul><li>Long term (up to 10 years) </li></ul><ul><ul><li>Capital expenditure budget </li></ul></ul>

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