The Cash Budget-Free-Samples for Students-Myassignmenthlep.com

Questions: 1.Prepare a Cash Budget for February, March and April, if the bank balance on 1 February is expected to be $30,000. 2.Briefly discuss the ways that Orkin Ltd could solve its cash shortfall problem. 3.Briefly discuss the advantages of preparing Cash Budget. Answers: 1. Statement showing cash Budget Particulars February March April Receipts Cash Sales (70%) $119,000.00 $140,000.00 $161,000.00 Received from debtors after one month $45,000.00 $51,000.00 $60,000.00 Total Receipt (A) $164,000.00 $191,000.00 $221,000.00 Payments Payment for purchase after 2 months $140,000.00 $80,000.00 $100,000.00 Wages and salaries $40,000.00 $50,000.00 $50,000.00 Overhead $26,000.00 $30,000.00 $30,000.00 Rent in advance $18,000.00 capital Expenditure $700,000.00 Total Payments (B) $206,000.00 $878,000.00 $180,000.00 Net cash generated (A-B) -$42,000.00 -$687,000.00 $41,000.00 Opening Balance $70,000.00 $28,000.00 -$659,000.00 Closing balance $28,000.00 -$659,000.00 -$618,000.00 Note: In order to calculate the overhead expenditure the depreciation and the rent amount has been deducted. 2.On analysing the current situation of Orkin Ltd it can be seen that the cash budget indicates that the cash outflow will be more than the cash inflow. This is a serious concern as the shortfall of cash reduces the liquidity of the business. The lack of liquidity in turn affects the operational capability and profitability of the business (Braun et al. 2014). In general, it can be said that a business can handle the cash shortfall situations by using the following means: In the current case, the main reason for cash deficiency is the capital expenditure is made in cash. It is recommended that in order to avoid the cash shortfall the capital expenditure should be made on credit. During a cash shortfall, the business shall try to collect its outstanding debts as soon as possible; In a cash shortfall situation a business can also borrow money from any external source and must use that effectively and efficiently to overcome such situation rapidly; The business might also identify its business assets that are of non-core in nature and sold them to acquire cash in such situation; The business must also try to reduce its cost as far as practicable by withdrawing no unnecessary funds out of business or leasing or hiring new premises instead of buying them in such situation or making delay in salary rising of the employees or reducing expenses that are related to overhead. In a cash crisis situation the business must also give significant important in monitoring as well as forecasting the cash flows. 3.The cash Budget can be termed as an estimation of the inflows and outflows of cash that affects the activities of a business over a particular period of time. Moreover, this budget can also be used to ensure whether there are sufficient availability of cash for a business to continue its operations (Edmonds et al. 2016). Generally, the main purpose behind preparing a cash budget is to get a detailed view about the companys inflows and outflows of cash within a specific period such as monthly, quarterly or annually. The major advantages ore benefit of preparing a cash budget consists of the following: Practical Benefits Cash Budget can assist the business by restricting it from making too many expenses. Spending much money in unnecessary things might to insolvency. Thus, this can be termed as a practical benefit that is drawn from cash budgeting. Moreover, cash budget helps in making realistic assessment of money that can be earned. This in turn can make the business realise about the amount of money that is available for spending and thus restricting it from any unnecessary or discretionary spending or expenses. Strategic Implementation Several benefits with respect to strategies can be derived from cash budget. A cash budget always makes the management to think critically regarding the financial position of the company. At the time of preparing the cash budget, a close reference from the past pattern of the companys strategy and sales are taken which are further utilised in estimation of the companys future business operations. In this manner the old strategies can be modified and improved to apply in the future activities of the business (DRURY 2013). Seasonal Planning Another essential feature of the cash budget is that is assists in planning the seasonal fluctuations of the sales and expenses of the business. A cash budget can assist the business by setting aside a part of money over a period of time to face several contingencies such as renewal of expensive licence. Moreover, it also helps in identifying those periods when the surplus money can be set aside so that the business can prepare for leaner periods. Self-Evaluation Self-evaluation is the most important characteristic and an advantage as well of cash budget. Through the cash budget, a business can have the basis of comparing its predictions with that of its actual outcomes or results. A cash budget is a pathway that is flexible for the purpose of keeping track of the spending of the business. Through this self-evaluation one can identify the error in assumption, when one finds that few incomes or expenses that were predicted are off base and can rectify the same in the future cash budget. References Braun, K.W., Tietz, W.M., Harrison, W.T., Bamber, L.S. and Horngren, C.T., 2014.Managerial accounting. Pearson. DRURY, C.M., 2013.Management and cost accounting. Springer. Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016.Fundamental managerial accounting concepts. McGraw-Hill Education.