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Business Budget and Money Management

Simple Alliance, Kenya Limited


A Control Tool

You use your business budget as a control device that helps to provide the standards by which you assess business performance. This control enables you to observe prudent money management tactics. Such control entails elements such as:

  • Cash budgeting
  • Profit planning
  • Balance sheet forecasting

Cash Budgeting

You use your cash budget to determine projected cash outflows and outflows. The cash budget serves important roles such as:  

  • Helping you to maintain an optimum level of cash probably based on a pre-set figure  
  • Determining whether your business requires additional funding so as to plug in cash deficits  

Preparation

You begin developing your cash budget by enumerating every transaction that impacts on you cash flow. The two major transactions in the budgeting process are:

  • Cash expenditures
  • Cash receipts
Cash Expenses

Items under this category include:

  • Cash operating expenses
  • Raw material purchases
  • Equipment and other asset purchases
  • Repayments on bank loans
Cash Receipts

Your major cash receipt items include:

  • Collection of accounts receivable
  • Cash sales
  • Proceeds of borrowings

Net Cash Balance

After listing all your cash receipt and expense items, deduct the expenditures from income. This arithmetic gives you the Net Cash Balance figure. You carry the figure over to the next accounting period as the opening cash balance.

Profit Plan

You derive your profit plan figures from your sales projections and associated expenditure and cost items. The profit plan enables you to:

  • Have an accurate understanding of your business’ numbers
  • Analyse the response of every expenditure items to sales fluctuations
  • Compare your actual with projected performance figures
  • Identify and correct any differences

Balance Sheet Projection

You carry out your balance sheet forecast so as to determine the assets required to support your projected sales figures. Based on your results, you execute the necessary modifications.    

Budgeting is a control tool that you use to derive the standards for evaluating your business’ performance. Ensuring proper money management is the key focus of such control. The major aspects of your business budget include balance sheet forecasting, cash budgeting, and profit planning.  Through cash budgeting, you make projections about the cash inflow and outflow transactions that your business will execute for a certain period of time. Your cash budget lists all your cash receipt items in one column and your cash expense items on the other column. The budgeting process involves the deduction of your expense items from your receipt items. This math gives you the net cash balance figure. Balance sheet forecasting enables you to project the levels of business assets required to support a specified level of projected sales. This exercise could prompt you to increase your level of assets if your outcome predicts a future asset constraint.  You develop your profit plan from your projected sales and the associated expense and revenue figures. The profit plan is useful to you in a number of ways. It enables you to have an accurate understanding of your business’ numbers. This knowledge helps you to analyse the response of every expenditure items to sales fluctuations. Thanks to the profit plan, you are also able to compare your actual with projected performance figures. Moreover, the profit plan helps you to identify and correct any differences.

Copyright (C) 2014, Simple Alliance Kenya Limited

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