3.2 Budgets and cash flow forecast

  

Budget

It is a monetary plan. It shows revenues and expenditures of a business unit or department for future time period.

Types of budget

·         Sales budget
·         Production budget
·         Marketing budget
·         Others

Advantages of budget:

1.      Control and monitor
2.      Reduce fraud
3.      Planning
4.      Efficiency
5.      Motivation

Format of Budget

Cash flow forecast

It shows inflows and outflows of money of a business of future time period.

Cash Inflows

The money coming into business. Incomes are:

·         Sales revenue
·         Loans
·         Fresh capital
·         Interest received, rent received, etc
·         Sale of assets

Cash outflows

The money going out of business. Payments are:

·         Wages, salaries

·         Loan repayment

·         Materials

·         Rent, rates, utilities

·         Tax, fees

·         Purchase of assets

Net cash flow

It is the difference between cash inflows and cash outflows.

Formula:

Net cash flow = Cash Inflows – Cash Outflows

N.B.Non-cash items like depreciation, provisions, etc are not taken into account in the cash        flow forecast.

Importance of cash flow forecast

1.      Identifying cash deficit or shortages

2.      Supporting applications for funding

3.      Help when planning the business

4.      Monitoring cash flow

 Format of Cash Flow Forecast

N.B. “to win one needs strategy,

to spend you need a budget!”