Cash flow management is the procedure to monitor, analyze and optimize total cash receipts that is reduced by the amount of cash payments.
The main purpose is to analyse the cash inflow and cash outflow for a specific period. Net changes or the difference between cash inflow and outflow is reported in the balance sheet.
Estimated cash inflows + Estimated sales – Estimated cash outflows = Ending cash balance
Cost of goods sold is largest component of cash outflow in retail business
Computer A/c…….. Dr XXX
To bank A/c XXX
[Being computer purchased through cheque]
It helps to know the liquidity position, solvency position and profitability position of the company.
|
Revenue |
$ 200,000.00 |
|
Cost of goods sold |
$ 150,000.00 |
|
Gross profit |
$ 50,000.00 |
|
Operating expenses |
$ 100,000.00 |
|
Net income |
$ (50,000.00) |
Cash flow
|
Month 1 |
Month 2 |
Month 3 |
|
|
Opening cash position |
$ (600.00) |
$ (50,420.00) |
$ (48,957.00) |
|
Total receipts |
$ 203,020.00 |
$ 4,680.00 |
$ 3,716.00 |
|
Total payments |
$ 252,840.00 |
$ 3,217.00 |
$ 5,960.00 |
|
Net cash flow |
$ (49,820.00) |
$ 1,463.00 |
$ (2,244.00) |
|
Closing cash position |
$ (50,420.00) |
$ (48,957.00) |
$ (51,201.00) |
Part B
If new wood fire pizza is sold for ($ 15.00 – $ 4.50) = $ 10.50, total income will be (150*12*$ 10.50) = $ 18,900. Therefore, increase in sales revenue = 9.8%. On the other hand, if the establishment is restored then the revenue can be increased by 20%. Hence, the 2nd option that is restoring of establishment shall be chosen. Further, when the return on the investment will be more the shareholders will also get convinced.
Persons having long experience of this segment for example hospitality sector shall be consulted before making final decisions.
The files those are necessary to maintain are tax related papers required for paying the taxes and the finance related working papers. Further, the records related to company name, payment invoices, various working dates and records associated with all the payments and receipts shall be maintained.
Budget helps to analyse the future profitability position of the company. Further, it recognizes the area where there is possibility of improvement and it also help is planning for the price of the product based on the expected cost of manufacture. Moreover it helps in reducing the expenses wherever possible.
1st date – 1st July
Last date – 30th June
Impact of dates on the budget
Generally, the major or important events take place 2 to 3 months before the closing of financial year. Therefore, based on the closing dates and budget the company can plan for payment of the dues and collecting the dues.
The company can use the software that will help to generate accurate information regarding finance and applying proper control on important data. Data management tools and workflow tools can be used for enhancing the consistency of the financial records.
The company can use Microsoft Excel for maintaining proper records. It will help to manage the employee’s wages related data, income and expenses data.
Using the software will help to improve the accuracy and speed of the preparing the data. It also helps to modify, delete or add the data to the existing one.
|
Financial Year |
Budgeted |
Actual |
Variance |
Reason |
|
2007/08 |
$ 350,000.00 |
$ 290,000.00 |
Unfavourable |
Variance is unfavourable as actual sale is lower by $ 60,000 as compared to budget |
|
2008/09 |
$ 400,000.00 |
$ 250,000.00 |
Unfavourable |
Variance is unfavourable as actual sale is lower by $ 150,000 as compared to budget |
Justification
Mr. Adam did not maintain the cash book, bank accounts, sales records and purchase records those were required to maintain for smooth business operation and maintaining proper records.
Simple technique can be used by the owner of coffee shop to improve the budgeting and accuracy. He must start with preparing the budgets for drinks and beverages requirements on daily basis. Further, database can help to assess the the stock left with the shop and plan for new stock purchase accordingly. Moreover, it shall use the computing system instead of the manual system.
References
Anderson, David, Dennis Sweeney, and Thomas Williams. Modern business statistics with Microsoft Excel. Nelson Education, 2014.
Bhandari, Shyam B., and Rajesh Iyer. “Predicting business failure using cash flow statement based measures.” Managerial Finance 39.7 (2013): 667-676.
Call, Andrew C., Shuping Chen, and Yen H. Tong. “Are analysts’ cash flow forecasts naïve extensions of their own earnings forecasts?.” Contemporary Accounting Research30.2 (2013): 438-465.
Coates IV, John C. “Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications.” Yale LJ 124 (2014): 882.
Farshadfar, Shadi, and Reza Monem. “Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows.” The international journal of accounting 48.1 (2013): 111-133.
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