Cash Budgeting
Why is it necessary to use a combination of actual and estimated information to prepare a cash budget?
A cash budget is a forecast, therefore figures need to be estimated. The figures are generally based on actual historical figures. Eg: Forecast credit sales are based on historical credit sales. This month's actual credit sales will be used to forecast cash from accounts receivable in the future. This month's credit purchases will be used to forecast next month's payments of accounts payable. Therefore a combination of actual and budgeted figures are included in the cash budget.
Why are book entries not included in a cash budget? Give an example
Book entries are journal entries which do not involve a transaction with outside party, there is no movement of cash in or out of the business. Cash budgets only include transaction involving cash inflows and outflows, therefore book entries are not included in a cash budget. Examples include depreciation and bad debts.
What could you suggest to management if there is a cash surplus , or cash shortage in the budget?
If there is a cash surplus, then management may consider to invest the cash in other investment area, pay off the loan earlier. If there is a cash shortage, then management may apply to the bank for overdraft amount, loan to be organized.
Explain the difference between viability and profitability
Profit refers to the amount of revenue earned less expenses incurred. Profitability refers to the ability of a business to make a profit in a given time period. A business may be profitable, but still unable to meet its cash outflow commitments if there is not adequate management and control of cash. Viability refers to the businesses ability to meet its short and long term commitments. A cash budget is a tool to assist management in forecasting cash flow, and action to be taken to ensure there is adequate cash supplies to pay outflow commitments.
Could you suggest 3 ways to reduce the cash shortage and the effect of payment outflow ?
The business may consider the followings: 1. make payment by credit card, it gives 30 credit to make payment. 2. for big purchase, negotiate pay by installments 3. or deposit follows by balance payment. 4. lease / rent the items instead of purchase
What is the purpose of preparing a cash budget? Why are cash budgets important management tools? Explain what is csh budget?
The purpose of a cash budget is to estimate cash receipts, cash payments and the resultant cash balances over a particular period in the future. It helps to determine whether the business can meet its short and long term commitments, and indicates to management if action needs to be taken to ensure payments are made when due. It therefore assists in meeting business goals.
Could you suggest 3 ways to improve cash collection from accounts receivable (credit sales).
To shorten the collection cycle, the business may consider 1. contact or call the customer to make payment when it overdue. 2. email , or SMS reminder to customers before and after the due date. 3. Offer discount on payment made by due date. 4. Control credit sales to customers with bad payment records.
Explain why GST reclaimable is calculated using estimated purchases.
When the business purchases inventory, services or other assets they are charged 10% GST. This GST payable can be offset the amount of the GST collected. In other words the GST is reclaimable or refundable from the tax office. This amount will be received in the month following the purchase.
