UNDERSTANDING MANAGEMENT ACCOUNTING AND FINANCIAL MANAGEMENT

Understanding Management accounting and Financial Management



Understanding Management accounting and Financial Management

Part A:

This part discusses the cash budget of South-guys partnership Ltd based on the provided budgeted income statement.

Following is the budgeted income statement for next six months:

Jan

Feb

Mar

Apr

May

Jun

£ 000

£ 000

£ 000

£ 000

£ 000

£ 000

Sales revenue

52

55

55

60

55

53

Cost of goods sold

30

31

31

35

31

32

Salaries and wages

10

10

10

10

10

10

Electricity

5

5

4

3

3

3

Depreciation

3

3

3

3

3

3

Other overheads

2

2

2

2

2

2

Total expenses

50

51

50

53

49

50

Profit for the month

2

4

5

7

6

3

a) Cash Budget Statement

Following is the cash budget of South-guys partnership Ltd for the month of January, February, March, April, May and June.

Cash Budget

 

£ 000

£ 000

£ 000

£ 000

£ 000

£ 000

 

Jan

Feb

Mar

Apr

May

Jun

Cash Balance

12

53

52

43

63

88

Sales Revenue

60

52

55

55

60

55

Less: Expenses

 

 

 

 

 

 

Inventories paid

30

30

25

25

25

25

Salaries and wages

10

10

10

10

10

10

Electricity

 

 

14

 

 

9

Van Purchase

 

 

15

 

 

 

Cash Balance

32

65

43

63

88

99

b) (b)Write a brief report explaining how budgeting can facilitate the process of South-guys partnership Ltd's management control mentioning relevant advantages and areas were attention should be placed.

Brief Report

The cash budget which is also known as projected cash flow is the budget that shows the forecast of future inflows and outflows of money (cash) of a company, for a period of time.

The importance of cash budget is that it allows us to predict the future availability of cash: whether we will have a deficit or a lack of cash, or if we have a surplus, and, accordingly we make decisions, For example:

If we anticipate that we will have a deficit or will be necessary to have more cash, we can, for example: • apply for financing promptly. • seeking to refinance debt. • Request a trade credit (credit pay for purchases instead of cash) or, in any event claim more credit. • collecting cash and no credit or, in any case, provide a less credit.

If we anticipate that we will have surplus cash, we can, for example: • invest in new machinery or equipment. • invest in buying more merchandise. • invest in business expansion. • use in investments outside the company, for example, invest in stocks.

On the other hand, the cash budget allows us to know the future site of a project or business: whether the future project or business will be profitable (when future income is higher than future expenses), or whether we will be able to pay promptly a debt.

It is very common to hear, say or talk about the budget and finances of the company. The budget is a management tool that lets you set a spending and savings plan, means knowing in detail what your income and payments are due from his company, for it is necessary to set deadlines or dates on which the filmmakers better control. The budget allows companies to prioritize and evaluate the achievement of its objectives, and will allow for the development of the company, through comparison of actual expenditure and real disposable cash expenditure and budgeted at a given time this comparison will yield budgetary mistakes and allow you to take measures to correct or improve organizational performance of the company.

In short, the budget is a valuable tool for the company by the following:

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