Topic 6 - Cash Budgeting. Higher Business Management

Transcription

1 Topic 6 - Cash Budgeting Higher Business Management 1

2 Learning Intentions / Success Criteria Learning Intentions Cash Budgeting Success Criteria Learners should be able to describe and explain: the purpose of budgeting as an aid to decision making the interpretation of cash budgets as a means of solving cash flow issues. 2

3 Cash Flow Cash is a crucial resource in any organisation. It is needed to pay bills, to purchase assets, to pay employees and to achieve different objectives. Most organisations have the aim of making a profit, but they also need cash on a day-to-day basis to operate. Making profit and having a healthy cash flow are two different things. It is important that an organisation monitors its cash flow (or liquidity position) so that it can continue to meet its financial obligations and operate successfully. 3

4 Causes and Solutions to a Cash Flow Problems Source Too much money tied up in stock Too many credit sales Too long a payment period for credit sales Not enough credit purchases High amounts of spending on non-current assets Increasing expense costs Too many drawings by owners Not enough sales revenue Solution Use just-in-time (JIT) stock control. Selling off excess stock, e.g. through a sale. Offer cash discounts to encourage customers to pay in cash. Charge higher interest on credit sales to encourage customers to pay sooner. Switch suppliers to those with interest-free credit available on purchases. Pay for non-current assets instalments, such as paying for a vehicle using hire purchase. Look for ways to reduce expenses, e.g. spend less on rent by selling online through e-commerce. Charge higher interest on drawings to discourage owners from withdrawing money from the business. Adapt the marketing mix to encourage more sales, e.g. lower prices. Too many unpaid debts Sell debts to debt factoring companies. 4

5 Cash Budgets To help manage cash and ensure control over future cash flow, a cash budget can be prepared. This is a forecast of the money expected to be received (receipts) and the money expected to be paid out (payments) over a period of time. Common terms that appear in a cash budget: Opening balance Total receipts Cash available Total payments Closing balance. 5

6 Terms that appear in a Cash Budget Term Opening balance Total receipts Cash available Total payments Closing balance Definition The amount of cash available at the start of the month. The total cash received during the month. The amount of cash available to spend. Calculated by: opening balance + total receipts The total amount of cash spent during the month. The amount of cash available at the end of the month. Calculated by: cash available total payments 6

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8 Interpreting Information in a Cash Budget (1) Problem Interpretation Solution Cash sales are falling. This could be caused by seasonal factors such as the business selling goods suitable for summer months only. There may also be other external factors at play, such as a recession or rising interest rates. The business should engage in marketing activities, for example, lowering prices or launching promotions, such as advertising or buy-one-get-one-free (BOGOF) deals to encourage custom. 8

9 Interpreting Information in a Cash Budget (2) Problem Interpretation Solution Purchases are increasing. The business is trying too much money up in stock. The stock is not selling, yet they have ordered more and more. Use just-in-time (JIT) stock control. 9

10 Interpreting Information in a Cash Budget (3) Problem Interpretation Solution Expenses are increasing. The business is paying increasing costs for expenses, for example rising rent. Switch to cheaper premises or sell online to cut rent costs dramatically. 10

11 Interpreting Information in a Cash Budget (4) Problem Interpretation Solution Negative closing balance. The business may have a deficit which means their payments outweigh their receipts. This leaves the business unable to pay off other debts and expenses. Arrange more finance in the short term, such as another loan, overdraft or attract investment, for example, through business angels. 11

12 The Benefits of Preparing a Cash Budget include: It shows whether the business will have a surplus (more cash expected to come in than will go out) or deficit (more cash expected to go out than will come in). It shows whether additional finance is required to ensure the business continues to operate effectively. It helps control expenses by highlighting periods when expenses could be high. It helps to make decisions, e.g. whether to launch into a new product area. It measures performance of departments. 12

13 Uses for Cash Budgets A cash budget could be used as a target for the organisation and different departments within the organisation to work towards. In a large organisation, each department may have its own budget and the authority for controlling (and spending) this budget would be delegated to the department s manager. Management could compare the actual spending of the department with the amount budgeted, to assess the department manager s skills in budgeting. It would be the responsibility of the department manager to ensure his/her department stays within budget and, where necessary, take action to ensure it does so. 13