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You are required to: 1
You are required to: 1. Explain Cash Budget 2. Prepare Cash budget for Company 3. Interpret the Results. 4. Give your recommendation for Credit Policy of Company. 5. What do you think about company's Cash or Liquid Position? 6. How company can increase its liquidity?
Cash budget is a summary of cash receipts and cash payments over a specific period of times. This budget tells whether the company has sufficient cash to operate or not. Saudi Agricultural Company Cash Budget For the Three months ending April 30 February March April 5000 -50000 -51500 391) 40 41 42 432) 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 24000 72000 26000 96000 18000 68000 3000 94000 46000 70500 Opening Balance of Cash Add Cash receipts Cash Sales 80% Collected in the next month Interest Income Total Cash Available Less Disbursements Payment to Suppliers Payment for Wages Payment for Overheads Rent expense Advance Income Tax Paid Rent expense Advance Income Tax Paid Bonus Purchase of Plant Total Disbursements Ending Balance 48000 10000 13500 1000 52000 11000 15000 1000 60000 14000 16000 1000 15000 1000 1000 1000 15000 10000 61500 144000 -50000 18500 97500 -51500 106000 35500 57 58 59 60 61 62 63 64 65 66 67 66 Company's Liquidity position is very poor.It has to change its credit policy.
Expert Solution
- Cash Budegt is one of the important statement which depsicits the details of cash receipt and its utilisation and the balance in a particular month. Cash budget is prepared so as to envisage the cash movement and mobility of cash in a particular period. Since cash is blood for the organisation, it is important to ensure that sufficient cash is available . This is the reason cash budget is prepared so as to observe the availability of cash in the organisation. With the help of cash budegt, the organisation is able to identify the cash surplus/cash defiiciency and arrangement can be made for ensuring availability of cash
- The cash budget has already been prepared in the attached image and it has been prepared well.
- The cash budget shows that the liquidity position of the company is not satisfactory and it has cash gaps which may result into difficulty in operating the business. Herein it is suggested to take necessary measures for improving upon the liquidity position of the company
- Presently the company has a policy of collecting the 80% in the next month and there is no information available w.r.t recovery of balance 20%. It predicts that the 20% revenue is not collected in a define time period which is not recommended at all. The company must ensure recovery of 100% revenue within a defined time period and ideally credit of mroe than two months should not be allowed
- The cash/liquid position of the company is very tight and not recommended . the company is in the situation of cash defiicient organisation and this may result into difficulty in paying its dues of suppliers/taxes. the company must take immediate steps to improve its liquidity position
- Follwowing steps may be undertaken by the company to increase the liquidity
- Defining the credit period for its coustomers and ensuring the adherence of the credit period
- Putting mechanism for ensuring recovery of the amount pending with the custiomers
- Deferring the purchase of plant if possible and looking for alternative like taking the plant on rent
- asking the suppliers to give credit period for the supplies made by them
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