Uses of Budgeting

As rightly indicated by Pinheiro (2014), budgeting can be considered as an important management that has different uses within a particular corporation. Adamand Bevan (2016) opines that planning and control are the most important uses of the budget. Critical analysis helps in comprehending the fact that budgeting helps in planning that aids in providing a direction. However, budget considers the organizational plan and helps in quantifying the plans into tangible matter. In addition to this, Whited (2014) advocates that budget also plays a significant role in controlling within a particular corporation. Therefore, budget helps in enumerating performance against pre-determined targets that are established in the budget. Moreover, analytical appraisal of budgeting procedure replicates the fact that this encourages proper communication between departments or else employees and assist in coordination of different activities of the corporation.

In itself, budgeting procedure can also be utilized for communication of financial plans throughout diverse segments of the corporation. So, this shows the manner in which different segments of the business can fit together for form an assimilated plan for the entire corporation. Cox (2014) argues that budgeting procedure can also play a very motivational role in case of the budget can be set at the suitable level. As righty indicated by Cox (2014), the budgeting process providers the managers of an organization a target to attempt towards. Nevertheless, there also remains an argument if that is set at an inappropriate level that can be either too high or too low, thus can have reverse influence and at the same time can demoralise.

In essence, it can be hereby said that the cash budget can help the management of organizations in determining specific patterns regarding the way business can take in and pay out money for a particular period of time with the objective to maintain adequate cash for carrying out business operations and handle liabilities. However, analysis of the cash budget can assist the management of corporations in undertaking short term planning where the cash budget can be utilized as an important tool for planning the flow of cash (Turner 2016). However, the cash budget can be generally prepared on a month on month basis. Essentially, a proper cash budget can permit the owner to watch short term financial needs as well as opportunities for the specific business. During a particular month, a business might have surplus cash and might possibly have the potential to save money (Wu’adongoet al.  2015). Again, in another month, the business concern might face shortages of funds and might need to withdraw money from savings or else even use them for a bank loan for a short term period in order to cover the requirements.

Importance of Budget in Planning

Thus, the cash budget can aid the process of short term financial planning as this shows the anticipated cash inflows that are essentially the revenues as well as the outflows that are expends of the firm on particularly a month on month basis, thereby the shortages and excesses of cash during a specific period of time. Besides this, the cash budget also needed to be tracked against the reality that is the closeness of the performance of the firm to the anticipations and the projections (Vegaand Lam 2015). This in turn can assist in the process of providing real world input for the purpose of adjustment of the cash budget for a specific period and help in refining the process of thinking for the subsequent period.

The cash budget enumerated shows that the cash inflows shows the sources of cash of the organization and the cash outflows reflects the uses of the cash (Vegaand Lam 2015). The calculation for the cash budget shows that the total cash inflows from the proceeds of share issue, cash sales and receipts from debtors equals £548000. However, the cash outflows or else the uses of cash owing to payments to creditors, direct labour, fixed and variable production overhead, fixed administration overheads, capital expenditure and variable distribution overheads equals to £ 192240. Thus, the net cash position calculated by deducting the total cash inflow from the cash outflows is equal to £355760. Thereafter, the total opening cash£1100180 for all the 12 months is added to the net cash position at £355760 to arrive at the closing cash position that is equal to £2225940. The total opening cash is the addition of the opening cash for all the 12 months and the total net cash flow position of the firm is obtained by deducting the total annual cash outflow from the total annual inflow. Critical evaluation of the cash budget replicates the fact that the net cash flow is negative during the second month as well as the third month revealing shortages of cash. However, the opening cash balance outweighed the negative cash position during the second month leading to the positive closing cash (Turner 2016). However, the negative cash flow during the second month is mainly because the proceeds of share issues, cash sales and receipts from debtors are equal to zero leading to nullified or no inflows. Similarly, during the third month that is during March, the cash inflows of the company was zero and the cash outflows naturally directed towards negative net cash flow position of the company (Balanceet al. 2015).

Importance of Budget in Controlling

Analysis of cash budget reveals that the company utilize sales as well as production forecasts to generate a cash budget together with assumptions regarding necessary spending as well as accounts receivables. The results of the cash budget shows that that the company has a positive cash position and this can be regarded as a desirable factor (Whitecottonet al.  2013).

The trends of the cash flow will help to analyze the situation of the particular firm in a better and detailed way. Moreover, in other words, it can be said that the trend chart and along with it the trend analysis help in better understanding of the cash budget of the specified company.

At first, the trend analysis of the cash inflows of the particular company has been discussed below and it has been represented clearly with the help of the line graph.

Figure 1: Trend Analysis of Cash Inflows

(Source: Created by Author)

Based on the above line graph, it can be said that the particular firm has a poor condition regarding cash sales as it has been found that as per the cash budget of the corporation, the cash sales were nil in all the months of a particular year. In addition, it can be said that the total inflows of the firm was nil in the months of February and March as proceeds of share issue, cash sales and receivables were nil. However, it has been found that the cash inflow situation of the particular company started to become healthier from the month of April, thus total inflow increased from £ 20000 in January to £ 36000 in April. Nonetheless, it can be said that sales and proceeds of share issue were zero in April, but receivables of £ 36000 amount made the situation of the firm better. Furthermore, it has been found that the receivables of the firm increased constantly from May to November that is from £ 42000 to £ 78000 and this implies that the specified firm has a healthy financial condition. However, suddenly in the month of December, the cash inflows of the particular firm decreased to £ 72000 due to lesser amount of receivables.          

Secondly, the trend analysis of the cash outflows of the particular company has also been discussed below and it has been represented clearly with the help of the line graph.

Figure 1: Trend Analysis of Cash Outflows

Importance of Budget in Communication

(Source: Created by Author)

The above line graph implies that the cash outflows of the specified company increased constantly from the month of January until the month of September that is from £ 5470 in January to £ 20840 in September. However, it has been found that the cash outflows of the corporation started to decrease from the month of October. Thus, the cash outflows decreased from £ 19990 in October to £ 14430 in December. The main reasons behind increase in the cash outflows of the firm include – increase in the total amount of payables, direct labour charge, variable production overheads and variable distribution costs. However, it has been determined that the fixed administration and production overheads have helped the firm to control its overall expenses.        

In particular, cash balances might fluctuate considerably vary within a specific single accounting period, thus, masking shortfalls of cash that in turn can put the business in serious danger. However, in order to yield better results, cash budget can be generated and at the same time maintain forecasts of cash on a weekly basis (MungalandGarbharran 2014). Although the short term budgets can reasonably accurate for possibly a month and the precisions of the entire forecasts can decline swiftly (Vegaand Lam 2015). Subsequently, the company can switch to weekly budget for better precision of forecasts. In addition to this, the corporation can improve the cash budget by making better estimates regarding different aspects of the firm and the business environment in which the company operates (MungalandGarbharran 2014). The estimates developed need to be founded on reality and at the same time certain optimism. In particular, the estimated figures that are used for the preparation of the cash budget can also be made more precise by consulting with the managers, suppliers as well as other key personnel in order to help get the best possible guesses (Whitecottonet al.  2013). Therefore, it can be suggested that the firm should increase its proceeds of the share issue and the receivables for increasing its total inflows. On the other hand, in order to manage and control the total outflows of the firm, the financial manager of the firm should put focus on payables, cost of direct labour, variable production overheads and variable distribution expenses. The controlling of the variable costs will result into decrease in the cash outflows.   

The presentation of the sales budget shows that the sales volume are expressed in units that is volume for all the twelve months and the selling price is marked at £300 per unit. The multiplied value of the sales volume expressed in units with the selling price per unit (£) gives the sales amount for each of the twelve months. The total sales volume for the entire year is calculated to be 2160 and the total sales is enumerated to be £630000 obtained by addition of the sales of each of the months.

Cash Budget and Short Term Financial Planning

The production and fin. Goods inventory budget expressed in units shows the opening inventory in units, production in units for each of the months, sales in units for each of the months and the closing inventory(Adamand Bevan 2016). The closing inventory is calculated for each month by adding together the opening balance to the production units and deduction of the sales. The closing inventory of the first month roll over to become the opening inventory of the subsequent month (Adamand Bevan 2016).

The budget plan also includes the direct material usage, direct labour budget, variable production overhead budget, fixed production overhead budget, production fixed asset depreciation budget, fixed administration overhead budget, other budgets, capital expenditure budgets and share issues (Vegaand Lam 2015). However, there are two main components of the cash budget presented for the company, namely, the cash inflows that reflects the sources of the cash, cash outflows that in turn shows the uses of the cash in the company. Thereafter, the third section shows the net cash flow that is obtained by subtracting the cash outflows from the cash inflows (Whitecottonet al.  2013). Subsequently, the opening cash of each period is added to the net cash flow to arrive at the closing cash. The format of the cash budget also contain a column of total of each item of the budget at the right hand side (Vegaand Lam 2015).

References

Adam, C.S. and Bevan, D.L., 2016. 8 The Cash-Budget as a Restraint: The Experience. Investment and Risk in Africa, p.185.

Balance, B.C., Receipts, T.C., Receipts, F.T.C., Disbursements, T.C. and Disbursements, F.T.C., 2015. Cash Management.

Cox, P., 2014. Access: master budget project: available cash. Strategic Finance, 96(3), pp.54-56.

Cox, P., 2014. Master budget project: miscellaneous cash flow. Strategic Finance, 96(2), p.78.

Mungal, A. and Garbharran, H.L., 2014. Cash management challenges of small businesses in a developing community.

Pinheiro, J.D.O.G., 2014. Cash budget versus financial budget: advantages and disadvantages: a case study (Doctoral dissertation).

Turner, J.A., 2016. Net Operating Working Capital, Capital Budgeting, And Cash Budgets: A Teaching Example. American Journal of Business Education (Online), 9(1), p.31.

Vega, G. and Lam, M.S., 2015. Entrepreneurial finance: Concepts and cases. Routledge.

Whitecotton, S., Libby, R. and Phillips, F., 2013. Managerial accounting. McGraw-Hill Higher Education.

Whited, H.H.I., 2014. Constructing a Cash Budget and Projecting Financial Statements: An Exercise of Short-Term Financial Planning for Entrepreneurs.

Wu’adongo, O.F.W.A., Otieno, J., Onditi, A.A., Ojera, P.B. And Anyago, J.O., 2015. Relationship Between Efficient Cash Management And Profitability Of Small Sized Enterprises In Kisumu County, Kenya. Clear International Journal of Research in Commerce & Management, 6(4).