Cash-Flow & Budgets
Business: AQA A Level (2023 Specification), topic 5.1.5
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
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.
Test yourself on Cash-Flow & Budgets
What is the formula for net cash flow?
What can improve cash-flow?
What does favourable variance mean?
What does favourable variance mean?