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

This video looks at Budgeting and Forecasting

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.

This video looks at Cashflow

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

 

 

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