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Cash budget & purpose
The cash budget is a statement or plan of an organisation that gives detailed information about the future cash flows of an organisation. It divides the activities which result in the cash inflows and the operations that result in cash outflows and shows the surplus or deficit of the cash flow for a specific period, usually every month).
Purpose of Cash budget
Future cash position of the organisation. The cash budget helps the management of an organisation in the future status of the company. The knowledge of cash position in future will make managers make the decision early to avoid the future expected position. To forecast and predict the cash surplus or deficit in future periods. The knowledge of deficit or surplus will help the managers to plan future investment in case of cash surplus and plan for divesting in case of cash deficit. Cash budgets allow the management to do proper planning on the finances of the company. It helps the managers to predict the months that will have a deficit and plan in advance on how to deal with the situation either by a sale of short term security to finance the deficit.
Operational Budget & Purpose
Operational budget is a detailed schedule/statement that shows the expected operating expenses and income received in the future for a specific period, usually on an annual basis. Details in the operational budget typically depend on the size and structure of an organisation. Various elements put into consideration are the industry trend, level of taxation, historical analysis/performance and overall inflation rate or state of the economy.
Purpose of the operational budget
Tracking the performance of the organisation. Operational budgets help the management to monitor all the activities and performance of the whole organisation. It shows whether the production level is optimal, which will avoid wastage of the resources. Acts as a financial expenditure control tool. Operational budget acts as a control tool since it predicts future operating expenses and expected income generated from future activities of the organisations. It also allows a manager to spend only what was budgeted for, thus, reduces impromptu expenditures and controls. Projecting future investment of the company. Operational budgets help the management of the company to predict and plan for future investments. The budget shows the level of income surplus after all operational expenses deducted.
Case study: Budgeted Cash Position
From the case provided, eight (8) months had a deficit balance while the other four (4) months had a surplus. August registered the lowest cash sale at 120,000 while the expected highest cash sale will be on December at 384,000. At the same time, the credit sale will be highest in July while the lowest will October at 280,000. With the knowledge of the best performing and the worst performing months, the management can make strategies to manage the expected deficit or surplus in the said months.
On the expenditure side, the fixed expenditures cannot be varied and considered as a sunk cost that cannot influence the performance of the activities. The knowledge will help management to concentrate on the variable costs or expenses that can be varied or moderated to achieve maximum results.
Payment expenses and variable production costs registered over 80% of the expenditure of the organisation. The management ought to look at how to manage the variable costs to increase the surplus. From the case study provided Payment expenses and production variable was highest in December at 560,000 and 403,920 respectively while the lowest.
Ways of managing the surplus/deficit income
In case of a surplus income, management ought to invest the surplus income in short term securities so that it can earn income and avoid risks of loss through theft and prevents wastage of funds. In case of a deficit, management ought to divest, or sale the short term securities invested close the deficit gap so that operations can go on smoothly.