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Sweety Ltd: Cash budgeting - Essay Example

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Sweety Ltd: Cash budgeting

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, ...Show more

Summary

Sweety Ltd Cash budgeting Contents Introduction 3 i.Cash Budget 3 ii.How budgets help managers 3 Table 1 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…
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Sweety Ltd: Cash budgeting essay example
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