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Cash Budgeting at Sweety Ltd - Essay Example

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The essay "Cash Budgeting at Sweety Ltd" focuses on the critical analysis of the major issues in cash budgeting at Sweety Ltd, a confectionary trader based in London. Like all other businesses, it has to stay competitive in the market. It stays active on the marketing front to keep customers happy…
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Cash Budgeting at Sweety Ltd
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? Sweety Ltd Cash budgeting Contents Introduction 3 i.Cash Budget 3 ii.How budgets help managers 3 Table 5 iii.Analysis of Sweety Ltd 6 References 9 Introduction Sweety LTD is a confectionary trader based in London. Like all other businesses, it has to stay competitive in the market. Besides staying active on the marketing front to keep customers happy, Sweety LTD needs to do some financial analysis for the internal company accounts. In order to ensure positive cash supplies, a cash budget has to be prepared for an ending financial year. i. Cash Budget A cash budget is keeping an account of the inflows and outflows for a specified time period. It is important to know the liquidity of the business and its ability to fulfill everyday operations (investopedia 2011). The budgeting process includes four elements; cash inflows, cash expenditures, change in cash for the period and any new financing needed. Cash sales, purchases, loan payments, expenses, purchase of equipment, beginning balance and ending balance are all included in the process. The knowledge of a cash budget allows the company to determine its capability of giving goods on credit and the length of the credit time period. It’s a good way of summarizing the cash position in order to determine what needs to be done in the business. ii. How budgets help managers Cash budgeting is often used as a short term planning tool (Peavler, R 2011). The short term needs and opportunities of a business can be spotted. For instance, if cash is low then loans can be planned for or if there is excess cash it can be invested in funds for future use. Therefore, this monthly information is useful to manage the cash flow of the business. Moreover, financial institutions are more inclined to provide loans if a methodical cash plan is presented before them (Prepare a Cash Budget ). The strategic plan of a manager could be to expand a business and with only the knowledge of the cash situation, such plans can proceed. Expansion requires a lump sum of cash and a solid base to proceed with. There should be enough trust and confidence in the business by financial institutions in the success of the business. The cash position also shows if the business is doing well or not. However, too much cash may signify that resources/assets are not being utilized well and may not necessarily mean a very successful business. Cash budget can also allow managers to make investing decisions in capital as well. Furthermore, a cash budget combines all the departments of a business and displays a single cash position for the business. Allocation of the scarce resource, money, is then done accordingly.  The budget procedure is the tool by which the superior goals are mutually agreed upon. A budget reflects a game plan that is to be followed in order to achieve a common goal (Budgeting: planning for Success 2010). A vibrant cash budgeting process is not just about meeting ratios but should have liquidity management as its focus. Valuable cash budgeting begins with projecting and balancing cash flows. A quick strategy needs to be adopted with a failure of meeting the company needs (Sanders, J 1999) Table 1 Sweety Ltd Cash budget for the four months Ended April 2012 Worksheet November 2011 December 2011 January 2012 February 2012 March 2012 April 2012 Sales 2200,000 2300,000 2500,000 2700,000 2800,000 3000,000 Collections 30% cash sales 750,000 810,000 840,000 900,000 50% following month 1150,000 1250,000 1350,000 1400,000 20% second month 440,000 460,000 500,000 540,000 Total 2340,000 2520,000 2690,000 2840,000 Purchases (50% of sales) 1,100,000 1,150,000 1250,000 1350,000 1400,000 1500,000 60% following month 690,000 750,000 810,000 840,000 40% second month 440,000 460,000 500,000 540,000 Total 1130,000 1210,000 1310,000 1380,000 Expenses Salaries & wages 475,000 475,000 475,000 475,000 Advertisement 25000 25000 25000 25000 Ware house rental 100,000 100,000 100,000 100,000 Insurance 20,000 20,000 20,000 20,000 Utilities 30,000 30,000 30,000 30,000 Other expenses 95,000 95,000 95,000 95,000 Taxation 190,000 190,000 190,000 190,000 Sales commission (10% of sales paid in the next month) 230,000 250,000 270,000 280,000 Acquisition cost (5% of 12,000,000) - - - 600,000 Total disbursement 2295,000 2395,000 2,515,000 3,195,000 January 2012 February 2012 March 2012 April 2012 Opening balance 200,000 245,000 370,000 545,000 Inflow 2340,000 2520,000 2690,000 2840,000 Total 2540,000 2765,000 3060,000 3385,000 Outflow 2295,000 2395,000 2,515,000 3195,000 Ending balance 245,000 370,000 545,000 190,000 iii. Analysis of Sweety Ltd Sales have shown a positive trend in the past couple of months. Simultaneously, purchases have to be increased with the rising sales as well. However, sales are rising at a faster rate than purchases which is a positive signal. The cost per unit of purchases should remain the same and bulk buying should lead to more discounts. With severe competition coming in from other shops, Sweet Ltd also needs to come up with promotions and different sort of confectionaries to highlight its unique selling points. Discounts should be given when the expiry date of any product is near or there should be heavy promotion before any occasions. Christmas, Easter, new years, all should have a special menu at Sweet Ltd to be shared with loved ones. In order to pursue their own manufacturing facilities, Sweety Ltd needs to increase it costs and has to keep trained personnel to run the business. There will changes in taste and recipe when producing confectionaries at their own manufacturing factory. Maintenance will be a great concern after acquisition of machinery and premises. It should also be kept in mind that all sales will have to be met when an order is given. Therefore, all raw materials should be purchases beforehand. One drawback in this still remains. Sales are always fluctuating and at times they may not be so high, so raw materials such as bread, cream etc quickly deteriorate. Special warehousing facilities will need to be considered and such raw materials need to b quickly restocked. Sweety Ltd should have the capacity to meet extra demand especially before occasions. Once business is doing well, Sweety Ltd can also progress to custom cakes and other confectionaries. This will increase the popularity and uniqueness. Though this needs professional bakers and orders need to be perfectly be met. Expenses are constant which is a good signal as well. However, April 2012 underwent a brunt of 600,000 due to the acquisition costs of the expansion plans. The ending balance also reduced because of the heavy outflow. Nonetheless, Sweety Ltd still has a positive cash flows but it has to meet the monthly installments of 250,000 pounds every month starting from august 2012. Outflows would have to be looked into and once expansion has been done it will reap a good fortune for Sweety Ltd. Furthermore, Sweety Ltd should also consider expanding to other countries. It requires secondary and primary research before actually taking such a step but it’s a good way of expanding the business. Having positive cash balance, Sweety Ltd should use its resources well. For now, the manufacturing ability is a good start and by seeing the trend of the cash flows after April 2012, a loan should be considered to pay off the monthly installments for the acquisition of property and machinery. Conclusion: Sweety Ltd is a profitable business with a positive cash flow. The sales trend has shown positivity. Sweety Ltd managers have made a good decision of managing the manufacturing side by themselves. However, a lot of dedication is needed in it. Personalization and customization will be great benefits out of this decision. Sweet Ltd should keep up the efficient management and positive cash flow. Moreover, cash utilization decisions should keep erupting to ensure that cash is not lying idle. References Budgeting: Planning for Success (2010) Available: http://www.principlesofaccounting.com/chapter%2021.htm Last accessed: 6th August, 2011 Cash budget (2011) Available: http://www.investopedia.com/terms/c/cashbudget.asp Last accessed: 6th August 2011 Peavler, R (2011) Cash Budgeting and How to Use it Available: http://bizfinance.about.com/od/businessbudgeting/p/Cash_Budgeting.htm Last accessed 6th August, 2011 Prepare a Cash Budget Available: http://www.va-interactive.com/inbusiness/editorial/finance/ibt/cash_bud.html Last accessed: 6th August, 2011 Sanders, J (1999) FHLBInsider Available: http://www.fhlbi.com/news/bckissues/insider21.htm Last accessed 6th August, 2011 Read More
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