Bradley Corporation is a rapidly expanding specialist photocopier manufacturer in the UK. The sales budget of the company for the next year reveals a growing trend in the business. The company is expecting that the sales budget estimates will be met or exceeded through proper business policies and strategies. In order to ensure adequate cash flow for the expected sales growth company is required to prepare a detailed cash budget for the next year. In this assignment, the cash budget for the company on monthly basis (3 months) is prepared by taking into account the sales estimates figures.
Outline of the budgeting
A cash budget is a tool used for planning and controlling the receipts and payments of a firm over a projected period of time. The time period may vary from firm to firm i.e. it may be monthly budget, daily or weekly cash budget. A cash budget is prepared on the basis of cash forecast. The following budgeted cash flow statement shows the cash requirements for the three months of April, May and June for the expansion of the sales of the business. Through this cash flow statement it is expected to provide an overview of the total cash requirements for the business together with the expected source of cash flow. The company is expecting to maintain its excellent record of debt collection in the coming years also. Uncollectible accounts are negligible and thus it should not be considered in this analysis. Purchase of raw materials is the largest expenditure of the company which is equal 50% of sales.
Table 1. Cash Budget of Dadley Corporation by month (3 months)
Discussion on the importance of the cash budget for a rapidly growing company
Cash budget is an important tool in the hands of financial management for the planning and control of the working capital to ensure its solvency. It provides important information relating to the planning, control and performance measurement. Systematically produces cash budget can be used for taking important decisions relating to the future. Adequate financial control is possible by using a carefully prepared cash budget. By measuring the actual performance and comparing it with the budgeted performance, control becomes possible. Budgets are an important tool for planning and controlling the financial operation of the business.
There are mainly two methods of sshort-termcash forecasting: 1) the receipts and disbursement method 2) the adjusted net income method. The most commonly used is the receipts and disbursement method which is forecasts for a period of week or month. In the receipts and disbursement method the cash inflows and outflows are summarised in a particular period of time. The adjusted net income method forecast for a longer duration of few months to a year. The first step in preparing cash budget is the preparation of sales forecast and the cash inflows of the sales. After that the cash outflows are estimated. It includes the expenses like payment of wages, salaries, taxes, interest etc. The net cash balance is obtained from the cash inflows and outflows of each month. This helps in identifying whether the firm has excess or deficit fund.
Through the budgeting a forward looking perspective is possible by the managers of Dadley and it enables the managers to identify the better opportunities and adopting policies for exploiting the opportunities. It also enables them to anticipate problems that can be faced during the business operations and thus adequate steps can be followed in time to eliminate or reduce their severity. Cash budget acts as blue print for the company to follow in the forthcoming financial period. Cash budget is important for Dadley Corporation as it a rapidly expanding business firm. High growth rate is expected by the business and thus adequate cash flow has to be maintained by the company for smooth business practice. Cash budget is an essential factor for the company during a period of rapid expansion.
All businesses prepare a cash budget showing the receipts and payments. It may be either prepared quarterly or annually according to the type of business. Preparing cash budget helps in planning the short term requirements of the firm. It shows the ability of the firm to pay the liabilities and expenses. Proper cash budget helps to identify the actual cash inflows and cash outflows. Monthly cash budget helps in estimating the cash balances at each and every month and thus helps in tracking short term cash shortfalls.