5.2.1
Cash-Flow & Budgets
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Cash-Flow
Businesses can use cash-flow forecasts to estimate their total cash inflows and their total cash outflows for a future period of time.
Cash-flow forecast
- Total inflows include all cash inflows coming into the business during the period.
- Total outflows include all cash outflow leaving the business during the period.
- Net cash flow is the difference between total inflows and total outflows.
- The opening balance is the balance at the start of the month and is the same as the closing balance of the previous month.
Cash-flow problems
- Businesses that are profitable but have cash-flow or liquidity problems can become bankrupt as they lack short-term cash to pay short-term debts.
Improving cash-flow
- Money owed to the business is known as a receivable and businesses can reduce the trade credit period given to increase how quickly they receive their receivables, which improves cash-flow.
- Money owed by the business to others is known as a debtor (or payables) and a business can ask others for longer trade credit to reduce how quickly they must pay payables, which improves cash-flow.
Budgets
Businesses can use budgets to forecast revenue, expenditure, and profit during a period.
Revenue budgets
- A revenue budget forecasts expected revenues for a business during a period. If actual revenue is higher than the forecast, we call this 'favourable variance'. If revenue is less than expected, we call this 'adverse variance'.
Expenditure budgets
- An expenditure budget forecasts expected costs for a business during a period. A higher actual cost than forecast is an adverse variance, and a lower actual cost than forecast is a favourable variance.
Profit budgets
- Revenue and expenditure budgets can be used to create profit budgets. If overall profit is higher than forecast, there is a favourable variance. If overall profit is lower than forecast, there is an adverse variance.
Advantages of budgeting
- Budgets help businesses achieve targets and objectives.
- Budgets help managers and leaders focus on cost control which can increase profit.
- Budgets can be used to motivate staff by providing spending authority to individual departments and teams.
- For example, many hospitals assign budgets to individual departments and this motivates department managers and staff within departments as they are given authority to place orders.
1What is Business?
1.1Understanding the Nature of Business
1.2Understanding Different Business Forms
1.3External Environments
2Managers, Leadership & Decision Making
2.1Understanding Management
2.2Understanding Management Decision Making
2.3Understanding Stakeholders
3Decision Making to Improve Marketing Performance
3.1Decision Making to Improve Marketing Performance
3.2Understanding Markets & Customers
3.3Market Segmentation, Targeting & Positioning
3.4Marketing Mix
3.4.1Marketing Mix3.4.2Product Decisions3.4.3Pricing Decisions & Price Skimming3.4.4Pricing Decisions & Price Penetration3.4.5A-A* (AO3/4) - Pricing & Competition3.4.6Promotional Decisions3.4.7Promotional Decisions 23.4.8Promotional Decisions 33.4.9Distribution Decisions3.4.10Distribution Decisions 23.4.11Digital Marketing3.4.12Evaluating Digital Marketing3.4.13A-A* (AO3/4) - The Marketing Mix & Promotion
4Decision Making to Improve Operational Performance
4.1Setting Operational Objectives
4.2Analysing Operational Performance
4.3Increasing Efficiency & Productivity
4.4Improving Quality
4.5Managing Inventory & Supply Chains
5Decision Making to Improve Financial Performance
5.1Financial Objectives
5.2Analysing Financial Performance
5.3Sources of Finance
5.4Improving Cash Flow & Profit
6Improving Human Resource Performance
6.1Human Resource Objectives
6.2Analysing Human Resource Performance
6.3Improving Organisational Design
6.4Improving Motivation & Engagement
6.5Improving Employer-Employee Relations
7Analysing the Strategic Position of a Business
7.1Mission, Corporate Objectives, Strategy
7.2Financial Ratio Analysis
7.3Overall Performance
7.4Political & Legal Change
7.5Economic Change
7.6Social & Technological Environment
7.7Competitive Environment
7.8Investment Appraisal
8Choosing Strategic Direction
8.1Choosing Areas of Competition
8.2Choosing How to Compete
9How to Pursue Strategies
9.1Change in Scale
9.2Assessing Innovation
9.3Assessing Internationalisation
9.4Digital Technology
10Managing Strategic Change
10.1Managing Change
10.2Managing Organisational Culture
10.3Managing Strategic Implementation
10.4Problems with Strategy
Jump to other topics
1What is Business?
1.1Understanding the Nature of Business
1.2Understanding Different Business Forms
1.3External Environments
2Managers, Leadership & Decision Making
2.1Understanding Management
2.2Understanding Management Decision Making
2.3Understanding Stakeholders
3Decision Making to Improve Marketing Performance
3.1Decision Making to Improve Marketing Performance
3.2Understanding Markets & Customers
3.3Market Segmentation, Targeting & Positioning
3.4Marketing Mix
3.4.1Marketing Mix3.4.2Product Decisions3.4.3Pricing Decisions & Price Skimming3.4.4Pricing Decisions & Price Penetration3.4.5A-A* (AO3/4) - Pricing & Competition3.4.6Promotional Decisions3.4.7Promotional Decisions 23.4.8Promotional Decisions 33.4.9Distribution Decisions3.4.10Distribution Decisions 23.4.11Digital Marketing3.4.12Evaluating Digital Marketing3.4.13A-A* (AO3/4) - The Marketing Mix & Promotion
4Decision Making to Improve Operational Performance
4.1Setting Operational Objectives
4.2Analysing Operational Performance
4.3Increasing Efficiency & Productivity
4.4Improving Quality
4.5Managing Inventory & Supply Chains
5Decision Making to Improve Financial Performance
5.1Financial Objectives
5.2Analysing Financial Performance
5.3Sources of Finance
5.4Improving Cash Flow & Profit
6Improving Human Resource Performance
6.1Human Resource Objectives
6.2Analysing Human Resource Performance
6.3Improving Organisational Design
6.4Improving Motivation & Engagement
6.5Improving Employer-Employee Relations
7Analysing the Strategic Position of a Business
7.1Mission, Corporate Objectives, Strategy
7.2Financial Ratio Analysis
7.3Overall Performance
7.4Political & Legal Change
7.5Economic Change
7.6Social & Technological Environment
7.7Competitive Environment
7.8Investment Appraisal
8Choosing Strategic Direction
8.1Choosing Areas of Competition
8.2Choosing How to Compete
9How to Pursue Strategies
9.1Change in Scale
9.2Assessing Innovation
9.3Assessing Internationalisation
9.4Digital Technology
10Managing Strategic Change
10.1Managing Change
10.2Managing Organisational Culture
10.3Managing Strategic Implementation
10.4Problems with Strategy
Practice questions on Cash-Flow & Budgets
Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.
- 1What is the formula for net cash flow?Multiple choice
- 2What can improve cash-flow?Fill in the list
- 3What does favourable variance mean?Multiple choice
- 4What does favourable variance mean?Multiple choice
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