Business – 5.5 Budgets – Meaning and purpose of budgets | e-Consult
5.5 Budgets – Meaning and purpose of budgets (1 questions)
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How the cash budget controls cash flow:
- It provides a clear picture of expected cash inflows and outflows, allowing the retailer to anticipate periods of surplus (e.g., March) and shortfall (e.g., February).
- By comparing actual receipts and payments with the budget, the manager can identify variances early and take corrective action, such as delaying non‑essential purchases when the closing balance falls below a safe threshold.
- The budget sets a target closing balance (£5,000 minimum in this example), helping to maintain liquidity for day‑to‑day operations.
Potential limitations:
- Reliance on estimates: The accuracy of the budget depends on the reliability of the cash receipt forecasts. Unexpected changes in sales or supplier terms can render the budget misleading.
- Static nature: The budget is prepared for a three‑month horizon and does not automatically adjust for sudden market shifts, such as a rapid increase in demand that would require additional stock purchases.
- Excludes non‑cash items: It does not consider depreciation or credit sales that affect profitability but not immediate cash flow, potentially giving an incomplete view of the business’s financial health.