Purpose of a Cash Budget - Coursework Example

A. Purpose of a cash budget A budget is strong financial forecast tool that a business cannot do without in its daily business operation. In this regards it therefore implies that budget estimate should be realistic as well as attainable in order to ensure that the business survive in a competitive market and with minimal capital or capital rationing in the business. Function of budget Budget as a control tool Budget survive to act as a control tool since, the company follows the budget in its daily operation as well as ensure that variance between the budgeted and actual spending and income depict small variance (Bakuzonis 2007). This as a result streamlines business operation and ensures that the company spends wisely and within the set limits. Budget as forecasting tool Budget act as a forecasting tool since, the company assume future performance of the business on the basis of the past and current business trends. This will therefore help the company in anticipating the future trend in terms of business profitability as well as measures to be taken care off at present in order to ensure that the company doesn’t incur loss in the future. Cash budget Cash budget February March April Opening cash 51234 50000 50000 Receipt Cash sales 85800 100800 176000 Debtors collection 137034 150800 226000 Cash available 274068 301600 452000 Payment Purchases -200115 -159530 -134000 store space -120,000 0 0 Council rates -27,650 0 0 Salaries -158000 -158000 -158000 tax (0.3) -19500 -18900 -45600 interest rate (0.12) 36143.64 10179.6 0 short term loans 265053.36 74650.4 0 Closing balance 50000 50000 114400 The above cash budget depicts a normal cash receipt and payment budget with a closing balance of 114400 by the end of April. This amount is significant to the company daily operation and as a result, the working capital can finance the daily operation of the business. The company is considering a new strategies that new to be adopted in order to enhance the availability of cash balances and consequently to improve the working capital and cash management of the company. Budget achievability From the above budget estimates, it can conclude that the budget is realist and can be achieved since the company is making a practical forecast in relation to its past historic trend. The forecasted sales are relevant to past historical sales trend analysis as well as the trend in cash project and the manner in which debtors are to pay their debt (Bruns 2005). In this case the management ensures that the debtor’s collection period is reduced and creditor’s payment period is increased. This strategy will help the business to fiancé its daily operation using the working capital and thus guaranteeing the liquidity position of the company The budgeted financial planning can help in enhancing the controlling function in that the budget will act as a control tool in which the company will follow in ensuring the company set goals is achieved within the stipulated time. Manager will struggle to ensure that budget is followed and make effort to attain it. In this case, budget will act as control tool during the daily operation of the business by as well as providing the general direction of how the desired end will result will be achieved. Workers will inform of the business targeted result and mangers will ensure that workers know what is expected of the business by providing proper guideline to be followed in budget execution. In this case, controlling as a budgeting tool is enhanced (Ekholm 2000). Also, manager’s tries to ensure that the business is out of their path as far as budget is concern and therefore frequent check of the business and budgeted plan is analyzed in order to check for budget consistency. b. The number of units of Snow skate, Surf skate and Dirtskate to be sold Target profit is $280,000 Snowskate Surfskate Dirtskate Total Selling price 265 235 195 695 less; variable cost expense -251 -184 -135 -570 Contribution per unit 14 51 60 125 Units sold 31000 11529.4 8633 5600 total contribution 434000 588000 518000 700000 fixed cost -420000 -420000 -420000 -420000 profit 14000 168000 98000 280000 C. whether the order from The Surfboardroom should be accepted Units buy 1000 Selling price per unit $195 Total variable cost = (196-5-7) =$ 184 per unit Contribution = {1000*195-184) =11,000 Total hours consumer by 1000 units of surf skate {30 minutes*1000}/60 minutes} =500 hours Hours available {0.1/0.9*4000hours}=444 hours It can be observed from the above assessment that the offer will lead to a positive contribution of $11,000 which is acceptable. It can as well be observed that there is 10% extra production capacity amounting to 444 hours while they require time is 500 hours for the new offer. As a result, the offer is acceptable since the company will release profit from investment in terms of positive contribution form investment. d. From a non-financial viewpoint can the order by the Surfboardroom be accepted The offer should not be accepted since it is not going to improve the profitability ratio of the company due to loss to be realized from the offer price (Gerald Miller 2001). It can be observed that the company is facing financial risk and thus accepting more offers that will create more losses to be business is like pushing the company going concern at extreme point of liquidation. e. Should the Snowskate line be discontinued? Snowskate Sales 175000 Variable cost -157500 Contribution 17500 It can observed that the production of snowskate generate positive contribution of $17500. Which implies that the production can only cover its variable cost and thus the production line cannot be discounted? Impact of dropping a production line on existing production line Surfskate Dirtskate Sales 2100000 1225000 Variable cost -1540000 -857500 Fixed cost -234000 -155000 Remodeling cost -32500 -32500 Depreciation -108000 0 Redundant cost -213500 -213500 Net loss -28000 -33500 Where a production line is dropped, the impact of the cost associated with the dropped line will be allotted to the existing production line on an equitable basis in order to ensure effective cost allocation of the dropped production line (Janet M. Kelly n.d.). From the above analysis, it can be observed that dropping a production line will lead to loss to the existing production line which implies that the production line cannot be dropped due to loss to other production department as well as the positive contribution of 17500 that is brought by snowskirte. Cash flow management is relevant since, it determine the company’s future liquidity position. In this regards ideal cash management is important since it ensures that the daily operation of the business will be financed using the effective working capital of the company. An effective working capital management is the one that ensures that debtor’s collection period takes shortest time possible while the creditor’s payment period takes the longest time possible to repay (Jensen 2003). In order to ensure that debtors takes the shortest time in repaying their loam, the company ought to provide incentives such as the discount option on goods bought in bulk or repaid within the shortest time. As a result, the company’s working capital management will be enhanced. Other factors to consider The company should consider other external factors that might affect the cash management strategy to be adopted by the business. Some of these factors include 1. Economic situation (The effect of inflation) An inflation may affect the general economic condition and thus the busies may be negatively affected (Pamela P. Peterson 2004), This would consequently lead to liquidity problem since, the creditors will not be in a position to buy goods at the current rate due to economic recession, The consequence would thus lead to reduction in reported net sales and profit and hence solvency ratio may be at risk. The company should therefore consider the current economic conditions as well as the future business situation that may affect the company’s performance and as the cash flow and consider other mitigating factors to be instituted in case of the economic recession. 2. Existing project The company should consider the present project and amount they use in the project. This will help to ascertain the degree of cash available required as well as the magnitude of cash management that is required in order to ensure that an effective cash management is put in place. Existing project do consume a lot of funds and thus they at times put the company liquidity position at risk and consequently, the daily operation of the business ought to be financed using the working capital management (Röhm 2007). Effective working capital can only be achieved where the company ensure there is proper debtors and creditors management, this can be achieved where the company ensures that there is after sales services as well as providing incentives such as discount on bulk sales or on customers who takes the shortest time to repay their debt and at the same time, the company should ensures that it takes long to pay its creditors. 3. Customer expectation The company should consider the customer’s expectation on the quality of the product as well as the efficiency of their product since, the business can provide incentives yet their product do not meet the customer’s expectation and as a result, the incentive options will not be realized since, the numbers of clients buying the company’s product will be minimal (Röhm 2007). The effect of low customer turn over would lead to low sales level and as a result, the level of cash available in the business will be minimal as well. In order to get rid of this situation the business ought to provide product of highest quality that meets the customers desires as well as the product is attractive in the eyes of the customers’ so that, when a business offers discount incentives on the product, the sales level would` increase hence improving on the cash management in the business. Reference list Bakuzonis, Karen. Performance-based Budgeting AA Measures Outcomes . 2007. Bruns, W.and J. Waterhouse. "Budgetary control and organisation structure." Journal of Accounting Research 13 (2005): 177-203. Budgeting, A Basic Model of Performance-Based. Marc Robinson, ‎Mr. Duncan Last. New york, 2009. Ekholm, B.and J. Wallin. "Is the annual budget really dead." In review, European Accounting. 2000. examples, Performance-based budgeting: concepts and. Greg Hager, ‎Alice Hobson, ‎Ginny Wilson . 2001. Gerald Miller, ‎W. Bartley Hildreth, ‎Jack Rabin. Performance Based Budgeting. London, 2001. Janet M. Kelly, ‎William C. Rivenbark. Performance Budgeting for State and Local Government . Jensen, M. C. "the truth about the budgeting process." European Financial Management 406 (2003): 9. Pamela P. Peterson, ‎Frank J. Fabozzi. Capital Budgeting: Theory and Practice. 2004. Röhm, Sven. Are Traditional Budgeting Practices Out of Kilter. London, 2007. Secrett, Malcolm. Brilliant Budgets and Forecasts . New yorkl: Cengage learning, 2013. Wildavsky, Aaron B. Budgeting: A Comparative Theory of the Budgeting Process. 2006. Read More