The purpose of cash budgets Essay

Cash budget is an inflow and outflow of hard currency estimation prepared by direction in a concern for a specific period of clip. It helps direction in recognition control and determines whether there is available fund for widening operations. The intent of set abouting this study is to calculate a hard currency flow for the six months stoping 30th June 2011, puting up healthy recognition control system, and placing the factors to be considered when be aftering to put any forecasted excess hard currency for Enron limited which presently faced fiscal troubles in certain months of the twelvemonth stoping 31st December 2010.


Cash budget is an appraisal of a company ‘s hard currency influx and escape, it is an accounting device used in monitoring and pull offing a concern ‘ operating activities of immediate short term hard currency flow, a prognosis of a concern ‘s estimated hard currency grosss and payment over a period of clip normally months and old ages. All budgets are related to the hard currency budget which is a prognosis of the hard currency grosss and payments for the period, the importance of fixing a hard currency prognosis can non be over stressed for the handiness of equal hard currency resources is critical to successful concern operation. Workers must be paid in hard currency, revenue enhancement liabilities must be settled in hard currency, providers may keep back stuffs unless paid quickly and so on. In most instances a monthly hard currency budget will be found adequate as colonies between debitors and creditors are conventionally made at the terminal of each calendar month ( Joseph Baggott, 1973 ) .


In recent fiscal universe, it is required by most concern administration to fix hard currency budget anterior to doing outgo related to any planned development or familiarity of new assets. The hard currency budget determines house ‘s ability settling its liabilities and disbursals. secondly it helps in hedging possible hard currency deficits and idle hard currency, thirdly it assist direction in doing determination in respects to its hard currency modesty for fostering its activities, fourthly it assist the direction in accomplishing the aims of the concern in a specific period of clip and in conclusion it enables the existent fiscal operation to be measured against the prognosis of the concern.


Harmonizing to Garrison, Noreen and beer maker 2006, most companies encounter jobs when fixing their budget due to an addition in rising prices rate, exchange rates of foreign currency, governmental policies and the economic system state of affairs while McCain 1999 provinces that most budgets are merely provided for fundss non the people and that finance entirely is non plenty in accomplishing betterments of company public presentation. Budget provides immediate control over the environment assists to get the hang the fiscal stage of occupation and section and helps decode jobs prior to their happening ( Ali Osman Gurbus, 2010 ) .

In visible radiation of the differences highlighted above, the company should seek to supply room for any future incommodiousnesss, human resource direction and estimation hereafter grosss and outgo so as to be able to undertake jobs before their happening.


The budget commission consists of high degree executives in charge of assorted maps ( i.e. gross revenues, production and buying ) . In fiscal process the functional caput obtain an blessing by showing their budget to the commission, if the degree of budget does n’t incorporate a sensible public presentation, the functional caput will necessitate farther alterations in order to obtain an blessing. The budget commission appoints a budget officer known as the comptroller, whose take actions and coordinates the single budgets of a company. ( Colin Drury, 2000 ) The figure 1 chart below indicate the organisation chart of a budget commission

Figure 1


This budget can be analyzed into operational budget and fiscal budget, it culminates and are summarized in a company ‘s budgeted hard currency flow statement, budgeted net income and loss history and budgeted balance sheet statement of a concern, it show the fiscal public presentation of a company and helps the director to program and accomplish further for the hereafter. The budgets are approved by the authorization director of a duty Centre to transport out programs and so passed down through the company to the appropriate Centres. ( Willie Seal, Ray H. Garrison, Eric W. Noreen, 2006 ) . Figure 2 below indicates the major parts of a maestro budget including the operating and the fiscal budget.

Figure 2


The maestro budget is used to incorporate and organize the functional countries within a company ‘s operating activities, supply a method of measuring and commanding later facets of budget, and it serve as a communicative device in which the staff contribute attempt to the overall ends within an organisation procedure being inform of policies and programs, besides helps motivates its employees to execute in line with the aims. Master budget helps promote uninterrupted public presentation of the company ‘s concern in be aftering procedure to back up the direction to see picks that cut down costs and better value of client.


The budget created and approved by the direction move through set of process. In readying of a budgeting procedure, the processs in making the budget differs from one organisation to another and should be presented to the budget commission before it is eventually agreed. Some of import phases in the budgeting procedure are as follows:

I. Communicating inside informations of budget policy and guidelines: A long term planning procedure is the get downing point in the readying of a company ‘s one-year budget, the director are responsible for fixing and communicating of budget policy affected by the long term programs and supply of import guidelines to the top director to run into their aim.

II. Determining the factors that restrict end product: Company public presentation is restricted through restricting factors such as natural stuffs, labor and machine hr. The chief machine capacity of production restricts public presentation when the gross revenues demand excess the available capacity and can be determined by the top direction.

III. Preparation of the gross revenues budget: In many organisations the sale volumes and blend determine the degree of operations that restricts a company ‘s end product, a sale prognosis of a concern has to be created before the sale budget can be prepared.

IV. Initial readying of budgets: The budgets are originated by the lower degree of direction and are coordinated by the higher degree of direction. The directors are responsible and participates in the readying of run intoing the public presentation of a company ‘s budget and supplying the top direction for finding the content of budgets

V. Negotiation of budgets: Once a budget has been prepared by the director, it should be submitted to the superior to obtain an blessing and credence. The budget should be agreed and negotiated by parties, the director and the superior. This procedure is indispensable in the budgeting procedure as it determines whether or non a company ‘s budget has effectual tools of direction.

VI. Coordination of budgets: The budget is likely to be reviewed belonging to another which indicate and modify if the budget are out of balance, the main accountant identify such dissension and inform them to the director ‘s attending and modifying such alterations that should be made. During this alteration procedure the director guarantee the budgeted net income and loss history, budgeted balance sheet statement and the hard currency budget are prepared to turn out credence.

VII. Final credence of the budget: After all the budgeted net income and loss history, budgeted balance sheet statement and the hard currency budget have been accepted, they are so summarized into the maestro budget to O.K. and so passed down through the company to the suited duty Centres.

VIII. Budget reappraisal: The budgeting procedure does non halt until it have been agreed and on a regular footing there should be a comparing between the existent consequences and the budgeted consequences, which should be sent to the direction for probe of possible differences in ground. If the grounds of differences are within the countries of control of direction, disciplinary step should be taken and to guarantee such inefficiencies non to happen in the hereafter.


In Appendix 1 Enron Ltd hard currency budget indicates that gross revenues are lower in January boulder clay March and increased in April upward to June. The hard currency excess occurs in January, February and March which it is the surplus of hard currency grosss over payment, but the hard currency shortages occurs from April to June which indicate available financess hard currency payments exceed the hard currency grosss. Therefore an investing in hard currency excess can be on a short term footing in hazard free securities and bank sedimentations which can easy be transformed into hard currency to settle off debts. Such investing chosen are relied on involved hazard, size of bing sum, offered output and effects for early backdown. Since the company has been holding fiscal troubles in the old twelvemonth stoping 31st December 2010 for a period of short clip, it might be obscureness in obtaining long term beginnings of investing


Management of hard currency flow is an indispensable portion of accounting process in concern in which direction should take notice of when be aftering budget. Good recognition control system must be set by an organisation in order to guarantee prompt payment from clients so as to be able to run into short term duties and avoid the hazard of being belly-up. The following are the stairss in which houses should set about in order to accomplish an effectual recognition control system.

I. Put up a elaborate recognition control system: It allows company to place the bills that has been raised, paid and sent to clients. Each single client have a separate file with inside informations bespeaking their contact name, concern name and reference, contact figure and postal reference.

II. Credit cheque clients: Enron limited should near client ‘s bank or opposite number providers for mention to look into on possible debitor recognition worthiness before trading.

III. Decide on payment footings: Enron limited should clearly expose their payment footings on their bill and guarantee that clients are cognizant company recognition policy.

IV. Post bills quickly: The Firm should direct out bills to respective client on same day of the month goods dispatched and do certain it is delivered to the right individual and reference.

V. Deciding on reminder process: The Company should flag all their bills that are due and send clients statement of history to each client through electronic mail or station to function as reminders. Telephone calls should besides be used to trail payments.

VI. Make a Stop list for late-paying debitors: This is a list which the house should fix and direct to allow employee in order to halt goods being supplied to owing clients. Debtors should besides be cognizant of the list.

VII. Forming a sufficient overdraft: The Company should hold available financess to cover their hard currency flows and see paying up per centum of bills in return for committee


As it is clearly stated above, Enron Limited experienced hard currency deficit in certain months of the twelvemonth from its past operations bespeaking that it needs to outsource income in order to go on its operation. Bank overdraft is one of the method in which a company usage to get the better of its shortages in footings of any hard currency deficit rousing. An overdrawn is said to be when the company withdraws more than what it has in its bank history. It has some advantages and disadvantages.The chief advantages of utilizing bank overdraft is its flexibleness in financing day-to-day concern activities and involvement are merely be paid on the overdrawn sum while its disadvantages are, involvement rates are higher than loans and bank can bespeak for refund from company at any point in clip go forthing the company with no eventuality financess if on a regular basis overdrawn.


Cash budget if suitably prepared and implemented is really helpful to the concern, but there are figure of restriction associated to it that must be taken into history. First and foremost is uncertainness, budgeting involves extended sum of calculating the hereafter which is non easy to hold close right estimation of company ‘s hard currency grosss and outgo, it might take to unwanted status e.g. losing clients in footings rigorous payment policy if there is no flexibleness in using the hard currency budget by the finance director. Besides employees who do non hold in some portion of the budget will experience non apt for any incommodiousnesss which may originate in the hereafter, and last but non the least is expensive as it require significant sum of money, clip and attempt.


In visible radiation of the survey performed above Enron Limited had hard currency excesss from January to March while experient hard currency deficits from April to June ( Appendix 1 ) . All gross revenues made by the company are on recognition and payments are received in the 2nd month following the month of sale.

The fiscal advisers recommend Enron limited to present hard currency price reduction gross revenues in order to promote hard currency sale and put a good recognition control system in order to hold prompt payment from debitors and avoid the hazard of bad debt. Cash budget should be prepared by the company in order to expect future grosss and payments but flexibleness should be attached to it where necessary in order to avoid losing clients. Enron limited hard currency excesss should be invested in short term footing in order to recover hard currency easy when needed while its hard currency shortage should be conquered by bank overdraft in so as to be able to go on its operation as involvement rate is merely charged on the overdrawn sum.