cash budgeting Flashcards
(17 cards)
what are five reasons why cash flow problems may occur?
- low sales
- too much money tied up in stock
- customers taking too long to pay their bills
- suppliers not allowing credit or a limited credit period
- owner taking too much money out the business
what are five impacts of cash flow problems?
- unable to pay suppliers meaning stock is not delivered and production stops
- may need to find a cheaper supplier which may reduce the quality of products
- costs may increase due to interest on any extra funds borrowed
- no money to invest in future growth
- owner may need to reduce their drawings
what are seven ways in which cash flow problems can be solved?
- Find a cheaper supplier
- Lease machinery or equipment
- Sell any assets that are not being used effectively
- Apply for a loan or overdraft from the bank
- Offer discounts to customers for paying up front or paying for goods quickly
- Arrange extra time to pay bills from supplier (increase credit terms)
- Increase advertising or sales promotion
what is the justification for Find a cheaper supplier?
This will reduce the cost of purchases meaning more cash available from each sale
what is the justification for Lease machinery or equipment?
This allows a business to spread the cost of the purchase over many months
what is the justification for Sell any assets that are not being used effectively?
This will release cash that can be used elsewhere in the business
what is the justification for Apply for a loan or overdraft from the bank?
This will help to cover immediate cash flow problems but will need to be paid back over time with interest
what is the justification for Offer discounts to customers for paying up front or paying for goods quickly?
This will encourage customers to pay quickly and reduce the number of people who owe the business money
what is the justification for Arrange extra time to pay bills from supplier (increase credit terms)?
This will give the business time to raise the cash needed to pay bills
what is the justification for Increase advertising or sales promotion?
This will increase sales meaning more cash coming into the business
what is a cash budget?
- a document produced to help a business manage their cash flow
- prepared in advance and shows all the planned monthly cash incomings (receipts) and any planned cash outgoings (payments)
what are five benefits of preparing a cash budget?
- It can identify any times where there may be a shortage of cash. This will allow the business to plan ahead and arrange extra funding such as a bank overdraft
- It can help to regulate expenses. Any months where expenses are high will be highlighted by a cash budget.
- It will clearly show where a business has more cash than expected (surplus) or less cash than expected (deficit). This will allow a business to plan more effectively and make better decisions.
- It can be used to show potential lenders or investors. This can help to secure investment in the business.
- It can be used to set targets or budgets for individual departments. This may motivate employees as they have goals to achieve
what are the four main items on a cash budget?
- opening balance
- receipts
- payments
- closing balance
what is the opening balance?
- amount of money you have available at the beginning of the month.
- It is the same amount as the closing balance from the month before
what are receipts?
a list of all the money coming into the business such as sales or rent received
what are payments?
a list of all money you expect to go out of your business such as rent, wages or electricity
what is the closing balance?
cash left at the end of the month after all payments have been taken away from the business receipts
