Friday, April 6, 2012

Finacial term: Cash and Budget


1. Introduction
       Financial planning is considered an important feature to run the firm’s operation smoothly. It provides framework for guiding, coordinating and controlling the firm’s actions to achieve its goals. Financial planning process has two main futures which include cash planning and profit planning in which the cash planning process uses the cash budget. Cash budget is based on the sales forecasts to determine short term cash surpluses and shortages. First we look the way of preparing cash budget. Latter part the emphasis will be given on the cash budget and its impact and how can it me minimized. Consequently the benefits and limitation of budgeting system and finally we will end with appropriate conclusion.

2. Cash Budget in Brief
       Cash budget or the cash statement is the firm’s planed inflows and outflows of cash. Indeed it is used for the firms to estimate its short tem cash requirements with the given emphasis son the planning for surplus and for cash shortage. Cash budget indicates whether a cash shortage or surplus is expected in each of the months covered by the forecast. The cash budget is generally prepared for a one year period divided into months. Each months figure is based on the internally imposed requirement of a minimum cash balance and represents the total balance at the end of the month. The nets cash receipts and disbursements for each period to calculate net cash flow (Gitman, 2004: 110-111).
        According to Jack Welch ‘Customer satisfaction, employee satisfaction and cash flow are the three most important indicators for a business.’ It is very much essential to make sure that the company has sufficient cash is available to meet its obligation and to ensure the idle cash is properly invested to maximize the return to the company. Therefore one of the main functions of the company is to maintain detailed cash budget and update it on a regular basis. The cash budget is a major element of a cash planning system and indicates the overall plan activity that illustrates cash inflows and out flows for a stated period of time. The cash budget is as follows:

3. Importance of Cash Budget in Rapidly Expanding Corporation
         Doomy Corporation, being a rapidly expanding photocopier manufacturer specialist has been modified for the use of the products. The company’s aim is to increase earnings than the last year and expected to be double in the next year. Though some of the unexpected events occur in the business may disrupt in achieving company’s goals.  It is believed that cash is the lifeblood of any business. Without having cash it is not possible to pay employees and suppliers that are necessary and key to run the business efficiently. Indeed the whole operation can become a screeching halt if employees and suppliers are not paid in time due to shortage of cash. Therefore managing cash is very much crucial for any kind of business especially for the rapidly expanding company and for the start up company. In addition a rapidly expanding company will need cash to finance new projects, R&D and other investments. To meet these company requires cash and ultimately the term budgeting comes. If the company has a positive cash flow, there is no problem except to identify where to invest the excess cash surplus. On the other hand in the case of negative, the problem is very crucial result in hampering the payment of bill and wages to the employers in time. However, negative cash flow doesn’t indicate the mismanagement of disaster. Business owners can have a better position to recognize and meet the future cash shortage through the effective cash flow management and therefore can keep their business operations running smoothly.
      Budget planner must be considered different aspects of situation before making the final decision. Sometimes banks are unwilling to lend money because banks are not in a position to trust whether it will be able to pay the amount in he right time. Since banks are operating with some certain policies and regulations they can not able to lend money as it is expected from them.

4. Some recommendations to avoid unforeseen events
        Preparing a cash budget the manager must be certain that some arrangement is made to ensure the availability of funds giving more concentration into the factors such as accounts receivable, inventory, accounts payable, capital expenditures and incurred debt. . Besides from the careful estimation of cash budget inputs, there are two ways of coping with the uncertainty of the cash budget. One is to prepare several cash budget which is based on pessimistic, most likely optimistic forecasts. From this range of financial manager can evaluate the amount of financing necessary to cover the most adverse situation. In addition to these the use of several cash budgets, based on the different assumptions provide the financial manager a sense of riskiness of different alternatives. This sensitivity analysis is often carried out to analyze cash flow under a certain circumstances. Computers and electronic spreadsheets are the process of performing sensitivity analysis (Gitman, 2004: 112-118).
         A second and more sophisticated way of coping with uncertainty or unforeseen events of the cash budgets is simulation. By stimulating the occurrence of sells and other uncertain events, the company can develop a probability distribution of its ending cash flows for each month. The financial decision maker can use the probability distribution to estimate the amount needed to shield the firm adequately against a cash shortage. Monitoring the cash flow on a regular basis can clearly show gain of the business. By establishing an effective billing and collection systems can help business go a long way towards maximizing the receivable income (Gitman, 2004: 112-118). Keeping customer debt under control be rewarding customers specially who pay on time and creating a plan of action for slow –pay and no pay accounts. Besides these giving proper attention to sector how the money is spending in the business. Expanding companies should give more emphasis on both leasing and should aware of ways of getting quick financing options when a short cash fall arises. Overall rigid knowledge of the financial facts of business life is very much important that could help Doomy Corporation from many unforeseen events (Susan, 2009).

5. Benefits result from budgeting system
       Budget is an essential part of any marketing activity. A good budgeting system performs planning and controlling function effectively. The planning process indicates all the ideas and plan in a meaningful term. For controlling the structure the company initiates careful planning in the preliminary stages combining each department in the budgeting process (Kieso et al, 2007). As a result there is a possibility of making a perfect decision and successful criteria in that combination i.e. coordination of activities that may result in achieving the company benefits. Budgeting systems provides the ways of allocating resources in such a way so that it can be used more effectively.   In addition cash budgeting process helps in enhancing managerial perspective and serves as benchmark for evaluating performance focusing on all the aspects of a company’s internal operations. Moreover, budget signals and alert managers about the expectations and with the achievement and thereby declining potential problems before they occur (Gitman, 2004: 116-118).
6. Limitations of Budgeting System
       Because the cash budget shows cash flows only on a total monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency. Therefore a firm or company must look more closely the pattern of it’s of daily cash receipts and cash disbursements in order to ensure sure that the cash is available for paying bills or wages as they come in due. In addition the synchronization of cash flows in the cash budget at month –end does not indicate that the company will be able to meet daily cash requirements as the company’s cash flows are usually variable when it is seen on a daily basis that demands that effective cash planning should look beyond the cash budget. The depreciation and other noncash chargers are not included in the cash budget because the merely represent a scheduled write-off of an earlier cash outflow (Gitman, 2004: 116-128). Besides these the impact of depreciation is reflected in the reduced cash outflow for tax payments

7. Conclusion
   For any kind of organization to run properly budget is an essential that can be accelerated by a good budgeting system that works on planning and controlling function effectively. From this perspective cash budgeting is particularly important for a rapidly expanding company such as Doomy Corporation. In doing so Dommy Corporation must consider its pattern of daily cash receipts and cash disbursements. In addition to these to cope with uncertainty in the cash budget, sensitivity analysis or stimulation can be used.  Therefore, financial managers must consider the overall aspects of different situation and plan the cash budget accordingly.

Reference

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