Cash Budgeting and Forecasting

Budgets

• A Budget is a forecast of costs and / or incomes
• Costs and Incomes must relate to a particular purpose
• Individual budgets must be based on a variety of different elements
• Individual budgets are brought together into a master budget which is for the organization as a whole

The purpose of a Budget is

• To plan - they help businesses control their finances as they plan expenditures over a period of time
• To control - help to ensure that businesses don’t spend more than they should

Advantages of Budgeting

• It indicates priorities
• It provides direction and co-ordination
• It assigns responsibility
• It can act as a motivator
• It should improve efficiency

Disadvantages of Budgeting

• Training requirements – staff need to be trained to set budgets and manage them
• Allocation of funds – managers may find it hard to allocate funds fairly and in the businesses best interests
• Short term vs. Long term planning – budgets usually only look at an annual plan therefore may fail to take a longer term view

Problems of Budgeting

• Incorrect allocations
• External factors
• Poor communication
• These problems can be overcome by flexible budgeting
• Some firms adopt zero budgeting to ensure allocations are not excessive

Cashflow

A Forecast is a prediction of what may happen in the future. A Cash Flow Forecast is therefore a prediction of the inflows and outflows of cash in the future.

Businesses use past figures and experiences to predict forecasts. A Cash Flow statement differs from a forecast. It detailed what has happened in the business, i.e. the money that has flowed in and out of the business.

Cash Flow versus Profit

• Cash flow is most important in the short term as it is the businesses ability to pay their bills
• Profit is more important in the long term
• Businesses can be profitable and still experience cash flow problems

Cash Flow Forecast

Cash Flow forecasts are used

• To anticipate potential shortages of cash
• To examine and possibly adjust the timings of receipts and payments, in order to avoid problems
• To arrange financial support where problems are forecast

In order to create a cash flow forecast you will need to know the following

• Opening balance
• Total incomes
  • - Sale of goods
  • - Rental income
• Total expenditures
  • - Materials
  • - Energy costs
  • - Wages
  • - Transport

Total incomes – total expenditures (outflows) = net cash flow

Opening balance + net cash flow = Closing balance

Closing balance is then carried forward as the opening balance for the next month

Problems with Cash Flow Forecasts

• Inaccurate market research
• Changing tastes
• Competitors
• Economic changes
• Uncertainty

Types of Cash Flow Problems

• Long term structural problems
• Cyclical features
• Internal problems / inefficiencies
• External changes
• Working capital problems

Causes of Cash Flow Problems

• Seasonal demand
• Overtrading
• Over-investment in fixed assets
• Credit sales
• Poor stock management
• Unforeseen change

Ways of Improving Cash Flow

• Improve planning
• More thorough market research
• Diversifying the product portfolio
• Improved decision making
• Contingency funds
• Use of sources of finance to avoid short term working capital problems