2 Table of Contents Potential benefits and pitfalls of cash flow budget....................................................................3 Expected business expenses and sources of revenue.................................................................3 Income statement, balance sheet and cash flow statement........................................................3 Adjusting cash budget to manage contingencies.......................................................................4 Difference between operating and cash budget.........................................................................5 Importance of budget variance analysis.....................................................................................5 Recommendations......................................................................................................................5 References..................................................................................................................................6
3 Potential benefits and pitfalls of cash flow budget The cash budget is important as with this cash balance will be maintained and all the obligations of the business will be met on time. The amount which is required to be borrowed or is in excess is ascertained with the help of this. There is a difference in the cash balance and profit and that is a disadvantage (DeFranco & Schmidgall, 2017). By this strategic objectives will be attained as the cash will be retained to be used in an emergency. With the help of this, the adjustment for the difficult times will be made which are involved in planning. The revenue will be increased by 10% by including all the expenses and labour cost which will be incurred in the making of budget. Expected business expenses and sources of revenue In the business, there will be various expenses that will be involved such as the labour cost which will be incurred on a per hour basis. The variable expense will be involved in which material and labour and other overheads will be considered. There will be a need for the marketing of product and that will also be considered in cost. The fixed expenses will be incorporated for rent and other charges which need to be considered in calculating the total cost. The funds will be available from various sources and in that main will be the sale which will be made and the amount which will be collected is a fund for the business. The shortage which will be faced will be met with the help of borrowing that will be taken from online national bank. Income statement, balance sheet and cash flow statement Income statement ParticularsAmount Sales$1,20,000 Purchases1,12,500 Gross profit$7,500 Rent, insurance and others3,000 Wages12,000 Net profit($7,500)
4 Balance sheet ParticularsAmount Current assets: Debtors43500 Cash9500 Total assets53000 Current liabilities: Net profit-7500 Provision for doubtful debt9000 Creditors45000 Loan6500 Total liabilities53000 Cash flow statement ParticularsAmount Cash flow from operating activities Cash collection97,500 Cash payments-1,05,000 Netcashflowfromoperating activities -7,500 Cash flow from investing activities- Cash flow from financing activities Loan taken6500 Net cash flow from all activities-1,000 Cash opening balance6000 Closing balance5,000 Adjusting the cash budget to manage contingencies The cash budget will be adjusted for the contingencies by incorporating the expenses in relation to the coming emergency. All the elements which will be required in such situations will be identified and fund for that will be made in the budget (Otley, 2016). All the shifts which are taking place in the market will be dealt with the help of emergency funds which will be created in the cash budget.
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5 Difference between operating and cash budget The cash budget is the recording of cash-related transactions that will be taking place in the business whereas in the operating budget all the data in relation to operations will be recorder whether it is in cash or non-cash manner (Jansen & Zarges, 2014). In cash budget single budget is made but in the operating budget, there are various sub-budgets that are prepared. They both are beneficial for the business as there will be proper planning which is made and it helps the business in managing the operations and cash requirements in an effective manner. Importance of budget variance analysis In the business, there are situations in which the actual performance is the difference from the budget and then variances arise in business. The variance may be favorable or adverse for the business and in order to determine its impact the variance analysis is performed (Yahya-Zadeh, 2012). With the help of this monitoring will be made and there will be proper control which will be established on the costs which are incurred in the business. The variance analysis shall be performed at least once in every budget period so that all the deviations can be identified on time and corrective actions can be taken. Recommendations From the findings which are made it is recommended to the business that the cash budget will be prepared for all the periods and with that cash requirements will be met appropriately. All the contingencies which may arise will be considered and incorporated in making the budget. With that, the profitability and position of the businessneed improvement as the losses are made in the current situation which needs to be eliminated. The variance analysis shows various deviation and they will be reduced by incorporating the required changes in the budget and by that overall improvement in the business will be made possible.
6 References DeFranco, A. L., & Schmidgall, R. S. (2017). Cash Budgets, Controls, and Management in Clubs.The Journal of Hospitality Financial Management,25(2), 112-122. Jansen, T., & Zarges, C. (2014). Performance analysis of randomised search heuristics operating with a fixed budget.Theoretical Computer Science,545, 39-58. Otley, D. (2016). The contingency theory of management accounting and control: 1980– 2014.Management accounting research,31, 45-62. Yahya-Zadeh,M. (2012).Comprehensivevarianceanalysisbasedonex postoptimal budget.Academy of Accounting and Financial Studies Journal,16, 65.