| 1) | What are the three sections of a Cash Budget, and what is included in each section? |
| | The 3 sections of a cash budget are cash receipts, cash disbursements and financing. The cash receipts section includes expected receipts from the company’s principal source(s) of cash, such as cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company’s capital stock. The cash disbursements section shows expected payments for inventory, labor, overhead, and selling and administrative expenses. It also includes projected payments for income taxes, dividends, investments, and plant assets. The financing section shows expected borrowings and repayments of borrowed funds plus interest. Financing is needed when there is a cash deficiency or when the cash balance is less than management’s minimum required balance.
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| 2) | Why is a Cash Budget so vital to a company? |
| | Cash is a vital life line for many businesses and therefore contributes to more effective cash management. A cash budget shows anticipated cash flows, usually over a one or-year period. It can show when a company will need additional financing, well before the actual need arises. On the hand, it can indicate when the company will have excess cash available for investments or other purposes. The alternative to a cash budget is one that is based on the availability of credit, or money that will have to be repaid down the line with interest. A cash budget therefor places limits on your purchasing and forces you to restrict discretionary purchases to items that you can pay for out of the cash you have on hand. Last but not least a cash budget can help to prepare you financially for seasonal fluctuations in sales and expenditures. |
| 3) | What are the five basic principles of cash management that a company can follow in order to improve its chances of having adequate cash? |
| | The basic principles of cash management include: a) increase the speed of receivables collection- the more quickly customers pay you, the more quickly you can use those funds b) keep inventory levels low- keep inventories level at just the size to conserve cash c) monitor the timing of payment of liabilities- don't pay bills too early or you will loose the ability to use that cash d) plan timing of major expenditures- make major expenditures when the company has excess cash e) invest idle cash- cash on hand earns nothing, consider investing to earn some extra cash in the form of interest |
| | 1. Revenue or Expense Budget |
| | 2. Collection of Receivables |
| | 3. Importance of No. |
| | 4. Negotiate Expenses |
| | 5. Cash Flow Dashboard |
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