The purpose of cash budgets

The intend of money calculates silver budget is an in melt down and outflow of nones bet watchful by management in a business for a specific occlusive of succession. It helps management in source determine and de statusines whether in that respect is avail suitable fund for extending operations. The purpose of undertaking this report is to count on a specie flow for the six months ending 30th June 2011, put inting up healthy credit control system, and identifying the factors to be realizeed when grooming to invest either forecasted surplus money for Enron trammel which currently faced monetary difficulties in certain months of the year ending 31st December 2010.THE CASH budgetCash budget is an estimation of a gilds cash in inflow and outflow, it is an chronicle device utilise in monitoring and managing a business run activities of immediate short barrier cash flow, a forecast of a businesss estimated cash receipts and payment over a period of time usually months and years. All budgets are related to the cash budget which is a forecast of the cash receipts and payments for the period, the importance of preparing a cash forecast flush toiletnot be over stressed for the avail force of adequate cash resources is life-sustaining to successful business operation. Workers must be remunerative in cash, revenue enhancement liabilities must be proved in cash, suppliers may withhold materials unless paid promptly and so on. In most cases a monthly cash budget will be found adequate as settlements in the midst of debtors and creditors are conventionally made at the end of each schedule month (Joseph Baggott, 1973).PURPOSE OF CASH figureIn recent financial world, it is required by most business organisation to prepare cash budget prior to making expenditure related to any intend development or acquaintance of new assets. The cash budget determines firms ability settling its liabilities and expenses. secondly it helps in evading possible cash shortages and idle cash, third it assist management in making decision in regards to its cash reserve for furthering its activities, fourthly it assist the management in achieving the objectives of the business in a specific period of time and inhabitly it enables the actual financial operation to be measured against the forecast of the business.LITERATURE REVIEW accord to Garrison, Noreen and brewer 2006, most companies encounter problems when preparing their budget due to an increase in inflation rate, exchange rank of foreign currency, governmental policies and the economy view while McCain 1999 states that most budgets are lonesome(prenominal) provided for finances not the slew and that finance alone is not enough in achieving improvements of companionship functioning. figure provides immediate control over the environment assists to pilot the financial frame of job and department and helps decipher problems prior to their occurrence (Ali Osman Gurbus, 2010).In lighter of the differences highlighted above, the company should try to provide room for any time to come inconveniences, benevolent resource management and estimate future receipts and expenditure so as to be able to tackle problems forward their occurrence.BUDGET directionThe budget committee consists of high level executives in charge of assorted functions (i.e. gross revenue, production and purchasing). In financial procedure the operable head father an approval by presenting their budget to the committee, if the level of budget doesnt contain a reasonable act, the functional head will required further changes in put uping to obtain an approval. The budget committee appoints a budget officer known as the accountant, whose take actions and coordinates the individual budgets of a company. (Colin Drury, 2000) The figure 1 chart below indicate the organization chart of a budget committeeFigure 1 passkey BUDGETThis budget can be analyzed into operational budget and financi al budget, it culminates and are summarized in a companys budgeted cash flow statement, budgeted clear and sack account and budgeted residuum sheet statement of a business, it show the financial performance of a company and helps the carriage to plan and achieve further for the future. The budgets are sanction by the authority manager of a responsibility centre to declare out plans and thence passed down through the company to the appropriate centres. (Willie Seal, pecker H. Garrison, Eric W. Noreen, 2006). Figure 2 below indicates the major parts of a master budget including the operating and the financial budget.Figure 2PURPOSE OF MASTER BUDGETThe master budget is used to integrate and coordinate the functional areas within a companys operating activities, provide a nightclub of evaluating and autocratic subsequently aspects of budget, and it serve as a communicative device in which the staff contribute effort to the overall goals within an organization cognitive operat ion beingness inform of policies and plans, also helps motivates its employees to perform in line with the objectives. inhibit budget helps promote continuous performance of the companys business in planning process to supports the management to consider choices that reduce costs and improve harbor of customer.STAGES IN THE BUDGETING PROCESSThe budget created and approved by the management die hard through set of procedure. In preparation of a budgeting process, the procedures in creating the budget differs from one organization to another and should be presented to the budget committee before it is finally agreed. Some important stages in the budgeting process are as followsI. Communicating details of budget insurance policy and guidelines A long term planning process is the starting point in the preparation of a companys annual budget, the manager are responsible for preparing and communication of budget policy affected by the long term plans and provide important guidelines to the return manager to meet their objective.II. Determining the factors that restrict output Company performance is restricted through limiting factors much(prenominal) as raw materials, bear on and machine hour. The principal machine capacity of production restricts performance when the exchanges demand excess the available capacity and can be indomitable by the top management.III. Preparation of the sales budget In umpteen organizations the sale volumes and mix determine the level of operations that restricts a companys output, a sale forecast of a business has to be created before the sale budget can be prepared.IV. Initial preparation of budgets The budgets are originated by the lower level of management and are coordinated by the higher(prenominal) level of management. The managers are responsible and participates in the preparation of meeting the performance of a companys budget and providing the top management for determining the content of budgetsV. duologue of bud gets Once a budget has been prepared by the manager, it should be submitted to the superior to obtain an approval and acceptance. The budget should be agreed and negotiated by parties, the manager and the superior. This process is essential in the budgeting process as it determines whether or not a companys budget has effective tools of management.VI. Coordination of budgets The budget is likely to be look backwarded belong to another which indicate and modify if the budget are out of balance, the chief(prenominal) accountant identify such disagreement and inform them to the managers attention and modifying such changes that should be made. During this revision process the manager vouch the budgeted profit and loss account, budgeted balance sheet statement and the cash budget are prepared to prove acceptance.VII. Final acceptance of the budget After all the budgeted profit and loss account, budgeted balance sheet statement and the cash budget start out been accepted , they are t hen summarized into the master budget to approve and then passed down through the company to the suitable responsibility centres.VIII. Budget review The budgeting process does not send away until it have been agreed and on a regular basis there should be a comparison between the actual results and the budgeted results, which should be sent to the management for investigation of possible differences in reason. If the reasons of differences are within the areas of control of management, corrective measure should be interpreted and to ensure such inefficiencies not to occur in the future.FACTORS TO CONSIDER IN INVESTING FORECASTED CASH SURPLUS BUDGETIn Appendix 1 Enron Ltd cash budget indicates that sales are lower in January cashbox March and increased in April upward to June. The cash surplus occurs in January, February and March which it is the excess of cash receipts over payment, but the cash deficits occurs from April to June which indicate available funds cash payments exceed the cash receipts. whence an investment in cash surplus can be on a short term basis in risk bighearted securities and bank deposits which can easily be transformed into cash to settle off debts. Such investment chosen are relied on problematical risk, size of existing amount, offered yield and consequences for early withdrawal. Since the company has been having financial difficulties in the previous year ending 31st December 2010 for a period of short time, it might be obscurity in obtaining long term sources of investmentCREDIT CONTROL SYSTEMManagement of cash flow is an essential part of accounting procedure in business in which management should take notice of when planning budget. Good credit control system must be set by an organization in order to ensure prompt payment from customers so as to be able to meet short term obligations and avoid the risk of being bankrupt. The succeeding(a) are the steps in which firms should undertake in order to achieve an effective credit control system.I. Set up a detailed credit control system It allows company to identify the invoices that has been raised, paid and sent to customers. Each individual customer have a discriminate file with details indicating their contact name, business name and address, contact digit and postal address.II. Credit check customers Enron limited should approach customers bank or counterpart suppliers for reference to check on potential debtor credit worthiness before trading.III. Decide on payment term Enron limited should clearly display their payment scathe on their invoice and ensure that customers are aware company credit policy.IV. Post invoices promptly The bulletproof should come out out invoices to respective customer on same come across goods dispatched and make sure it is delivered to the right person and address.V. Deciding on reminder procedure The Company should flag all their invoices that are due and send customers statement of account to each customer through e -mail or post to serve as reminders. Telephone calls should also be used to chase payments.VI. Make a Stop disceptation for late-paying debtors This is a list which the firm should prepare and send to appropriate employee in order to stop goods being supplied to owing customers. Debtors should also be aware of the list.VII. Organizing a fitting overdraft The Company should have available funds to cover their cash flows and consider paying up percentage of invoices in return for commissionADVANTAGES AND DISADVANTAGES OF apply OVERDRAFT FINANCEAs it is clearly stated above, Enron Limited experienced cash shortfall in certain months of the year from its past operations indicating that it ineluctably to outsource income in order to continue its operation. Bank overdraft is one of the method in which a company use to overcome its deficits in terms of any cash shortage arousal. An overdrawn is said to be when the company withdraws more than what it has in its bank account. It has som e advantages and disadvantages .The main advantages of using bank overdraft is its flexibleness in financing daily business activities and interest are only be paid on the overdrawn amount while its disadvantages are, interest rates are higher than loans and bank can request for repayment from company at any point in time leaving the company with no contingency funds if regularly overdrawn.LIMITATION OF CASH BUDGETCash budget if appropriately prepared and implemented is very laborsaving to the business, but there are number of limitation associated to it that must be taken into account. First and foremost is uncertainty, budgeting involves extensive amount of forecasting the future which is not easy to have near correct estimate of companys cash receipts and expenditure, it might lead to undesirable condition e.g. losing customers in terms strict payment policy if there is no flexibility in applying the cash budget by the finance manager. Also employees who do not agree in some par t of the budget will scent not liable for any inconveniences which may arise in the future, and last but not the least is expensive as it require considerable amount of money, time and effort.INTERPRETATION AND RECOMMENDATIONIn light of the claim performed above Enron Limited had cash surpluses from January to March while experienced cash shortages from April to June (Appendix 1). All sales made by the company are on credit and payments are received in the second month following the month of sale.The financial consultants recommend Enron limited to introduce cash terminate sales in order to encourage cash sale and set a good credit control system in order to have prompt payment from debtors and avoid the risk of bad debt. Cash budget should be prepared by the company in order to anticipate future receipts and payments but flexibility should be habituated to it where necessary in order to avoid losing customers. Enron limited cash surpluses should be invested in short term basis in order to call up cash easily when needed while its cash deficit should be conquered by bank overdraft in so as to be able to continue its operation as interest rate is only supercharged on the overdrawn amount.