Importance of Cash Budget for Organizational Financial Management

2. Learning Intentions At the end of this unit I will: • Understand the importance to an organisation of preparing a cash budget • Be able to prepare a cash budget • Be able to apply my bookkeeping skills • Value sources of finance and how they are used

3. 3

4. BEFORE WE BEGIN #04AFEF Do this exercise individually or in pairs. Tick whether you agree or disagree with the statements. Revisit it after the unit to see if you have changed your mind about any of them.

5. ‘3Ts’ = Turn, Think, Talk • Profit does not equal cash. Why might that be? Wonderful Worthwhile Website www.sageone.ie

6. Record Keeping Every organisation needs to know where it stands financially (what money it has). Key questions are: • Are we making a profit? • How much are we selling? • What are our costs? • Do we have sufficient cash? These questions can only be answered if the company keeps suitable records on its finances. These records must be correct and timely.

7. Record Keeping An organisation’s record-keeping allows it to manage: • Cash • Debtors • Stock

8. Record Keeping: Cash An organisation needs cash to: • Pay bills • Buy materials • Cover delays in payments from suppliers Having a cash safety net is vital. This is known as cash control. 8

9. Record Keeping: Debtors An organisation needs to: • Keep track of its debtors – people we sell goods to on credit • Ensure it doesn’t have bad debts – debtor who won’t or can’t pay This is known as credit control.

10. Record Keeping: Stock An organisation needs to ensure it has sufficientstock. • Too much stock is a waste of cash • Too little stock could cause the organisation to lose customers Having good stock control is essential.

11. Cash Budget A cash budget, or cash flow budget, is a tool for managing an organisation’s money. It shows: • Projected cash coming in • Projected cash going out A cash budget will show when an organisation needs extra money to cover expenditures. This is usually shown on a month-by-month basis.

12. How to Prepare a Cash Budget A cash budget should list all the incoming and outgoingcash items for 12 months. An organisation deals with cash sales, cash purchases, trade on credit and delayed payments.

13. Time to think How to Prepare a Cash Budget A debtor is someone we sell goods to on credit. They owe us money to pay at a later date. They are an asset. A creditor is someone we buy goods from on credit. We owe them money to pay at a later date. They are a liability. • Why might we sell on credit? • Why might we buy on credit?

14. Six Steps to Creating a Cash Budget • Prepare a skeleton template and insert opening cash • Record all receipts/cash in and total receipts • Record all payments/cash out and total payments • Calculate net cash position • Calculate planned opening cash • Calculate planned closing cash

15. Example: WildSurf Cash Budget WildSurf is a company selling surfboards on the west coast of Kerry. They have actual cash of €400 at the beginning of the year. We will work through the steps of creating their cash budget for three months, January to March.

16. 2.11 CASH BUDGET Step 1: Create a skeleton template and insert opening cash

17. 2.11 CASH BUDGET Step 2: Record all receipts/cash in and total receipts Sales of €3,000 a month. €1,500 in February and €500 in March from investors. A grant in February of €600.

18. 2.11 CASH BUDGET Step 3: Record all receipts/cash in and total receipts

20. 2.11 CASH BUDGET Step 4: Calculate Net Cash Position Net cash = total receipts - total payments

21. Step 5: Calculate Planned Open Cash The open cash in Total is the opening cash of January = €400.

22. Step 5: Calculate Planned Closing Cash • The closing cash of January becomes the opening cash of February • The opening cash in Total is the opening cash of January €400

24. Be Numerate • Read the Be Numerate section on page 335. • Then answer the questions on page 336.

25. Financing an Organisation The type of finance an organisation will choose will depend on: 1. Size of an organisation • A large organisation could share sell shares • A small organisation could use the owner’s savings 2. Stage of an organisation 3. Type of organisation 4. Type of finance also depends on timeframe

26. Matching Principle When deciding on a type of finance, it is important to use the matching principle. This means matching the source of finance with the use of finance. • Short-term finance • Medium-term finance • Long-term finance

27. Short-Term Finance (0-1 Year)

28. CHECKING IN • Ben White from GreenGo needs to paint the wall surrounding his garden centre and forest. He needs to purchase pain costing €500. What short-term source of finance might he use and why? • If Ben decides to overdraw his current account by €1,500 for five months and interest is charged at 8%, what interest will he pay? What interest would he pay if he had the overdraft for a full year? • Ben has applied to his local bank for a credit card. What advice might you give Ben about using a credit card? • What short-term sources of finance might an individual use? Why?

29. Medium-Term Finance (1-5 Years)

30. CHECKING IN • Ben White from GreenGo needs to buy two cars for his sales representatives. • Why might Ben use a medium-term source of finance to purchase cars? Which medium-term source of finance would you recommend and why? Are any of the medium-term sources free? • Which medium-term source of finance might a not-for-profit organisation, e.g. a charity, use? Why?

31. Long-Term Finance (More than 5 Years)

32. CHECKING IN • Ben White from GreenGo has decided to expand. He is going to form a private limited company, GreenGo Ltd. He has invited members of his family to be shareholders to raise extra capital. He wishes to buy land for his expansion, which will cost €100,000, and plant additional trees. Why might Ben use a long-term source of finance to purchase land? Which long-term source of finance would you recommend and why? • Which long-term source of finance might a not-for-profit organisation, e.g. a charity, use? Why? • Can you list which long-term sources of finance cost money?

33. 2.11 CASH BUDGET • What type of finance is leasing? Quick Quiz Short-term finance Medium-term finance Long-term finance

34. 2.11 CASH BUDGET • What type of finance is leasing? Quick Quiz Short-term finance Medium-term finance Long-term finance

35. 2.11 CASH BUDGET • What type of finance is leasing? Quick Quiz Short-term finance Medium-term finance Long-term finance

36. 2.11 CASH BUDGET • What type of finance is leasing? Quick Quiz Short-term finance Medium-term finance Long-term finance

37. 2.11 CASH BUDGET • Short-term finance is used to pay for expenses such as wages, insurance, light and heating. An example source of finance is a bank overdraft. Quick Quiz: Review • Medium-term finance is used to pay for items such as cars and computers. An example source of finance is leasing. • Long-term finance is used to pay for items such as buildings and land. An example source of finance is capital.

38. Factors When Deciding on a Source of Finance

39. CHECKING IN • What factors might decide the source of finances used by an organisation? • Should a business use an overdraft to buy an expensive piece of equipment? Explain why. • When building an extension to a premises, what source might be used? Why?

40. 40

41. Overdraft • Cash • Cash budget • Stock control • Credit • Creditor • Debtor • Loan • Grant • Hire purchase • Leasing