FINANCE

Cash and Capital Budgeting

Part A

Task 1

A budget is a document used for future estimations, the financial estimations of a business. It projects the future income and expense relating to future. This technique is done by individuals or companies in order to see whether the individual or the company would be able to continue its future operations or not. With the projected income and expenses the picture gets quite clear as to see what the future is likely to have for the individual or for the business.

There are different types of budgets like

Sales Budget

Production Budget

Material Budget

Labor Budget

Manufacturing overhead budget

Administration Expense Budget

Selling and Distribution Budget

Cash Budget

Cash budget is a planning tool which is a part of budgeting is used by business owners and the business managers. It is used for decision making for the future. Cash budget is made with regard to set some future targets in relation to production cost, sales and the profit to accomplish their goals within a set period of time. Though, it most important to some aspects before the preparation of a cash budget. The thing which needs to take care of is the previous budget and the estimation of profit and loss with the occurred profit and loss figures, the contemporary situation of the market along with the calculated review of competition that exist in the market. With all these things a particular time period, the desired level of cash, sales estimation and the expenses also the blank worksheet is needed to prepare the cash budget. Therefore it is a tool for planning which helps the organization's management in taking the most important decisions which does have impact on the organization's performance.

Budgeting is used for future estimations and to predict the future data based on previous figures. If correct extimations are being calculated then many of the problems gets solved and so many questions don't remain unanswered.

The Purpose of a Cash Budget

This is the basic level, of doing budgeting. The purpose of preparing a cash budget is a very important task for the management. While some of the small businesses survive even without making a budget for some time, but for large sized businesses it is very important to prepare cash budgets, because this provides them the power to take better decisions.

A cash budget helps in protecting the company from not being prepared for the fluctuations in cash flows during some specific seasons in a year or an organization prepares cash budgets to take advantage of the unexpected quantity discounts from the supplier.

Though there are other sorts of budgets which could be prepared like projected or the pro forma statements in finance, a cash budget serves as a plan for management for the most vital factor of an organization's feasibility, its position of cash. The cash position of the company determines how will it pay to its suppliers, how the banker will reply to the request submitted for loan by the company, at what rate the company is growing, it also helps in influencing the ...