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Explain the purpose of preparing a cash budget. - Scottish Highers Business Management - Question b - 2019
Question b
Explain the purpose of preparing a cash budget.
Worked Solution & Example Answer:Explain the purpose of preparing a cash budget. - Scottish Highers Business Management - Question b - 2019
Step 1
It shows whether the business will have a surplus of cash - which will allow them to plan future purchases.
Answer
A cash budget provides insights into the cash flow position of a business, allowing management to identify times when cash accumulation occurs. This surplus can then be used for strategic investments or planning for future expenditures.
Step 2
It shows whether the business will have a deficit - which will allow them to make adjustments to avoid shortfalls.
Answer
By projecting cash inflows and outflows, a cash budget can highlight potential deficits in advance. This foresight enables the business to take corrective actions, such as securing financing or adjusting spending, to prevent cash shortfalls.
Step 3
Step 4
It helps to compare between predicted and actual figures - this is vital for monitoring the performance of the business.
Answer
Regularly comparing budgeted figures against actual cash flows allows businesses to understand variances. This analysis is crucial for assessing performance and making necessary operational adjustments.
Step 5
Step 6
It can be used to set targets for individual departments to ensure that everyone is aligned with the overall budget.
Answer
By allocating budget figures to departments based on the cash budget, managers can set specific targets for spending, ensuring collaborative efforts toward financial goals.