Cash Budgeting and its Advantages for Business Operations

This article discusses the importance of cash budgeting for businesses and its advantages. It includes a statement showing cash budget, ways to handle cash shortfall situations, and the benefits of self-evaluation. The subject is accounting, and the course code and college/university are not mentioned.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the university:
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Table of Contents
Answer to Question a)................................................................................................................2
Answer to Question b)...............................................................................................................2
Answer to Question c)................................................................................................................3
Reference....................................................................................................................................5

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Answer to Question a)
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.
Answer to Question b)
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:

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 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.
Answer to Question c)
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 company’s inflows and outflows of cash
within a specific period such as monthly, quarterly or annually.

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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 company’s strategy and sales are taken which are further utilised
in estimation of the company’s 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-

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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.
Reference
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.