9.3 Preparing a cash budget

• A cash budget estimates all planned cash inflows and cash outflows
• Cash budgeting reveals potential cash shortages
• Steps for forecasting cash inflows and outflows using the direct method

  1️⃣ Estimate cash inflows

  2️⃣ Estimate cash outflows

  3️⃣ Calculate net cash flow

  4️⃣ Determine closing balance
• An increase in accounts receivable is subtracted
• Cash budgeting helps ensure sufficient cash to meet daily obligations.


  True
• Cash budgeting provides a basis for investment planning.


  True
• Depreciation is added back to net profit when using the indirect method.


  True
• Steps for forecasting cash inflows and outflows using the indirect method

  1️⃣ Adjust for non-cash expenses

  2️⃣ Adjust for changes in working capital

  3️⃣ Calculate net cash flow

  4️⃣ Determine closing balance
• How many primary methods are there for forecasting cash inflows and cash outflows in a cash budget?

  Two
• Steps in calculating net cash flow using the direct method

  1️⃣ Estimate cash inflows

  2️⃣ Estimate cash outflows

  3️⃣ Subtract total outflows from inflows
• The indirect method starts with net profit and adjusts for non-cash items
• An increase in accounts receivable is subtracted when adjusting for changes in working capital.


  True
• Why are both the direct and indirect methods essential in creating a cash budget?

  Manage cash effectively
• The two main methods used to forecast cash inflows and outflows are the direct and indirect methods
• If a business estimates inflows of £100,000 and outflows of £80,000, the net cash flow is £20,000.

  True
• The direct method forecasts cash inflows and outflows directly by examining actual receipts and payments
• If cash inflows are £100,000 and cash outflows are £80,000, the net cash flow is £20,000
• The net cash flow determines the closing cash balance.
• Why is cash budgeting important for managing cash flow?

  Ensures daily obligations are met
• Steps in financial decision-making using a cash budget

  1️⃣ Review cash inflows and outflows

  2️⃣ Calculate net cash flow

  3️⃣ Analyze closing cash balance

  4️⃣ Identify potential shortages or surpluses

  5️⃣ Make informed investment or borrowing decisions
• The indirect method starts with net profit and adjusts for non-cash items to derive cash flow.

  True
• Match the cause with its impact on cash budget discrepancies:

  Overestimated inflows ↔️ Insufficient cash for obligations

  Underestimated outflows ↔️ Reduced investment capacity

  Unexpected expenses ↔️ Strain on cash reserves
• Revising the budget is a corrective action for managing cash budget discrepancies.

  True
• Match the method for forecasting cash flows with its description:

  Direct Method ↔️ Examines actual receipts and payments

  Indirect Method ↔️ Starts with net profit and adjusts
• When estimating cash inflows using the direct method, businesses review sales forecasts and collection patterns
• What is reviewed when estimating cash outflows using the direct method?

  Supplier payment terms
• The closing balance is determined by adding net cash flow to the opening balance.


  True
• What non-cash expense is added back to net profit under the indirect method?

  Depreciation
• The closing balance is calculated by adding net cash flow to the opening balance
• Key calculations involved in preparing a cash budget

  1️⃣ Estimate cash inflows

  2️⃣ Estimate cash outflows

  3️⃣ Calculate net cash flow

  4️⃣ Determine closing cash balance
• What is the starting point for the indirect method in forecasting cash inflows and outflows?

  Net profit
• What does the net cash flow in a cash budget determine?

  Change in cash
• The indirect method starts with net profit and adjusts for non-cash items to derive cash flow.


  True
• What is a cash budget used for?

  Financial planning
• Cash budgeting is important for managing cash flow and identifying shortages.


  True
• Cash budgeting reveals potential cash shortages in advance.
• The direct method forecasts cash inflows and outflows by examining actual receipts and payments
• What is the primary goal of creating a comprehensive cash budget?

  Manage cash effectively
• To identify discrepancies, compare actual versus budgeted figures
• What is one way to prevent future cash budget discrepancies?

  Enhance forecasting