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Summary accounting - Budgeting
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MODULE 10: BUDGETINGINTRODUCTION:
We budget to achieve maximum profits through planning and control.
Management formulates certain objectives for the business.
For effective and reliable forecasting a business must:
- Have reliable and representative records of past transactions.
- Consider external factors like economic conditions.
- Take into account internal logical assumptions and contractual obligations.
Internal factors to consider:
- Purchase of fixed assets.
- Purchase of stock.
- Sales and debtors collection period.
- Purchase and creditors payment period.
- Financing methods and sources.
CASH BUDGET OF SOLE TRADER:
Works with cash only
Cash budget focuses on the projected receipts and projected payments.
And the future inflows and outflows of cash.
Shows what the cash position of a business will be in the future (3 or 6 months)
Estimations are made using existing data to forecast the future.
Serves as a control measure.
Essential for effective planning.
If deviations occur, corrective action needs to take place.
Needs to take unexpected circumstances into account.
CASH BUDGET OF A TRADING BUSINESS:
Works with cash and credit.
Many businesses have a cash only business that has many advantages:
- Not burdened with interviewing debtors.
- Receives payment immediately.
- Less administrative work.
- Positive impact on working capital.
- Cash flow is improved.
- No possibility of bad debts
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