Lecture 7

Budgeting
(Part 3)
 Learning Objectives

LO 1) Cash Budget
LO 2) Flexible Budget
 LO 1)
Cash Budget
Cash Budget
= is prepared to show the expected receipts and payments of
cash during the coming period.
~ quite often the annual budget will be divided into smaller
time period like monthly basis.
~ its important to note that cash receipts and cash payments are
not the same as sales and costs of sales.
 Purpose of Cash Budget

Purpose of Cash Budget

• to indicate if sufficient cash resources are available to finance
planned operations.
• To indicate the need for borrowing if a cash shortage is
expected or the availability of surplus cash for investment.
• To establish sound basis for the control of cash flows,
particularly the collection of debts and payments to creditors.
• To determine whether funds are sufficient for capital
expenditure.
• To determine whether the company is over-trading.
 Example 1 : Cash Budget

Example 1
 Example 1 : Cash Budget

Example 1
 How to Manage the Cash Flows

Managers who are managing the firms cash has the following
objectives.

Increasing Cash Inflows

= to increase cash inflows the firm needs to increase sales & to ensure
a higher return on the same amount of assets a company has.

Decreasing Cash Outflows

= its important for firms to reduce the cash outflow by reducing costs.
~ next, the risk in the business should be reduced, this is because
the higher the uncertainty, the higher cash balance is required.
Reducing risk will reduce the cash balance required.
 How to Manage the Cash Flows

Managers who are managing the firms cash has the following
objectives.

Speeding Up Cash Inflows

= there are several methods to speed up cash inflows :
Giving cash discounts when debtors pay within a few days of
purchases.
Electronic funds transfer, cheques are much slower.

Slowing Down Cash Outflows

~ this can be done by slowing down the payment of bills but
should not exceed the limit set.
 LO 2)
Flexible Budget
Fixed Budget
A budget which remains unchanged regardless of activity level is
called fixed budget.
• A fixed budget is prepared based on an estimated production
plan at the start of a period.
Example 2 : Fixed Budget
Example 2 : Fixed Budget
 Fixed Budget

Fixed Budget
• It does not give like with like comparison.
• It does not give fair performance evaluation.
• Fixed budget is normally prepared for planning purpose.
 Flexible Budget

Flexible Budget
A budget that flexes the budgeted level of costs and revenues
according to the level of activity actually achieved.
• Budget is initially prepared at the anticipated level of activity.
• The budgeted production level and the actual production
level may not be the same.
• Budgets may need to be adjusted to reflect the actual
production level.
• The new budget, flexed to the actual production level is called
the flexed budget.
• The budget prepared on different activity levels is called
flexible budget.
 Variance Reporting

Variance Reporting
• Actual costs are compared with the flexed budget for the
same volume of production and sales.
• ▪ Variance can be either favourable or adverse. Appropriate
control action is then taken to control variances.
• Its gives like with like comparison.
• It determines cost behaviour patterns.
• It gives realistic performance evaluation.
Solution : Example 2 : Flexible Budget