MARY GRACE ARZAGA-MASDO

DBM Student

Case 2 (BYP9-5): Budget Communication Activity

DBAMJR1: Advance Managerial Accounting
Professor: Candido M. Perez, PhD-Mgnt.,CPA

Response to Julie Fleming:

Julie, first you are advised to do cash budgeting in order for the business not to
experience financial strains. A cash budget is an estimation of your company’s cash inputs and
outputs over a specific period of time. Cash budgets are generally used to estimate whether a
company has a sufficient amount of cash to uphold regular operations. It can be also used to
determine whether too much of a company’s cash is being spent in unproductive ways or
determine when more cash resources are needed to support the business operations. Second, you
should prepare plan for the company’s inventory management.
As I look in your cash flow statement, your business has no sufficient cash to uphold the
business operations. You will notice much of your cash goes to your payment for products since
as you have mentioned the company purchase materials for the kits 2 months ahead of the time.
With this you have to invest additional cash to the business as part of the working capital and
you may also consider reducing the inventory lead time, if happened that the company is not
experiencing difficulty in acquiring raw materials. Purchasing materials 2 months ahead of the
time has also disadvantage especially if you don’t have vast working capital, it makes your cash
idle in the inventories, so by reducing the time lags (I am referring to the time you purchased
your materials to the time you will be using it.) you will be able to make your cash productive by
not making it idle in the inventory of raw materials. You have to prepare your production
schedules and properly align raw material orders from supplier directly to your production
schedules. This will lead to efficiency in production operations and ultimately result to an
increase in revenue. LPP should utilize strategy to increase efficiency and decrease waste
through receiving products and materials only as the company need them for production process.
This will able the company also to forecast their demand accurately.
Allowing credit sales has an advantages since it could be a way of creating goodwill with
customers to gain their loyalty and could increase sales, however you should have an additional
capital to fund your accounts receivable and since you don’t have the additional cash needed you
may consider increasing your accounts receivable turn over by reducing the one month credit
term into shorter time like 15 days. This will make you collect your receivable faster and this
will contribute to an increase of your inventory turnover. In this way you are being efficient in
managing your cash and at the same time were able to create good relationship with customers.
 I also suggest that you pay your workers biweekly if monthly is not possible to take
advantage of the time. Paying your worker biweekly will reduce the time spent in processing the
payroll as well as reduce the cost incurred during the process.

Julie, it is important to note that cash is a lifeblood of the business. A business has to
maintain sufficient cash enough to cover its annual operation in order not to experience financial
strains. Even if the company is making profit it is still a must to manage its cash flow correctly to
be successful. A company’s cash flow is tied to its operation, that’s why you have to employ
strategies for the business to operate efficiently, to its investment activities and financing
activities. Therefore, there must be a best opportunity for cash flow management.