Budgeting
The activity of making estimates of future results is known as forecasting.
Forecasting expected income and cash flows for the foreseeable future is an essential part of
business management.
It allows managers to financially quantify their objectives and then take corrective action in the
future when the actual results differ from those forecasted.
For effective and reliable forecasting of future business results the business must:
- Have reliable and representative records of past transactions.
- Consider external environmental factors such as the state of the economy, inflation,
- competitor and market trends.
- Take into account internal logical assumptions and contractual obligations relating to the
- future.
Internal factors that need to be considered:
- Is the business selling for cash only, or cash and on credit.
- If goods are sold on credit, what are the normal credit terms.
- What is the percentage mark-up.
- Is merchandise bought for cash only, or cash and on credit.
- If merchandise is bought on credit, what are the normal payment terms.
- What is the basis of depreciation.
- What is the interest rate payable on loans.
Important element of business management
= Concerned with cash funds (ensures the business remains liquid)
In order to make a realistic plan in respect of the cash flow, a Cash Budget as well as a Monthly
Forecast Income Statement should be prepared.
Assists in forecasting the expected net profit over the forecast period.
A cash budget deals with expected inflows and outflows of cash which includes income and
expenses, purchases or sales of fixed assets, obtaining or repayment of loans and transactions
of a cash nature between the owner and the business.
Note: Only deals with cash items.
Stock bought or sold on credit in one month may only be paid for or received in another month.
Writing off depreciation and bad debts does not involve cash flow so these items would not be
included in a Cash Budget but they will be included in a Monthly Forecast Income Statement.
These items are not payments, they are expenses: Depreciation and Bad Debts.
Analysis and interpretation of cash budgets and projected income statements:
Accountants need to be constantly monitoring the actual performance against the projected in
order to detect possible problems early and then to take the necessary corrective action.
The activity of making estimates of future results is known as forecasting.
Forecasting expected income and cash flows for the foreseeable future is an essential part of
business management.
It allows managers to financially quantify their objectives and then take corrective action in the
future when the actual results differ from those forecasted.
For effective and reliable forecasting of future business results the business must:
- Have reliable and representative records of past transactions.
- Consider external environmental factors such as the state of the economy, inflation,
- competitor and market trends.
- Take into account internal logical assumptions and contractual obligations relating to the
- future.
Internal factors that need to be considered:
- Is the business selling for cash only, or cash and on credit.
- If goods are sold on credit, what are the normal credit terms.
- What is the percentage mark-up.
- Is merchandise bought for cash only, or cash and on credit.
- If merchandise is bought on credit, what are the normal payment terms.
- What is the basis of depreciation.
- What is the interest rate payable on loans.
Important element of business management
= Concerned with cash funds (ensures the business remains liquid)
In order to make a realistic plan in respect of the cash flow, a Cash Budget as well as a Monthly
Forecast Income Statement should be prepared.
Assists in forecasting the expected net profit over the forecast period.
A cash budget deals with expected inflows and outflows of cash which includes income and
expenses, purchases or sales of fixed assets, obtaining or repayment of loans and transactions
of a cash nature between the owner and the business.
Note: Only deals with cash items.
Stock bought or sold on credit in one month may only be paid for or received in another month.
Writing off depreciation and bad debts does not involve cash flow so these items would not be
included in a Cash Budget but they will be included in a Monthly Forecast Income Statement.
These items are not payments, they are expenses: Depreciation and Bad Debts.
Analysis and interpretation of cash budgets and projected income statements:
Accountants need to be constantly monitoring the actual performance against the projected in
order to detect possible problems early and then to take the necessary corrective action.
