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What is primarily indicated by a budget?
What is one of the primary goals of a budget system?
Budget control is solely focused on determining the income of an organization.
False
List one of the functions of an integrated budget system.
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A successful budget system requires support only from top management.
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A budget must include specific ______ that must be set.
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What is one function of a budget?
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Match the following aspects with their corresponding descriptions:
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One limiting factor when compiling budgets can be the availability of __________.
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What is the primary focus of zero-based budgeting?
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Which of the following is NOT a management function related to budgeting?
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Match the following factors with their corresponding descriptions:
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Zero-based budgeting is likely to be effective for personnel budgets.
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What is the typical duration for a long-term financial plan?
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Budgets can be used only as a financial management tool and not for other purposes.
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Which of these is a condition for compiling successful budgets?
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Budgets should be filed away after they are prepared.
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What must be done to evaluate various departments within an organization?
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The financial planning process is driven by the __________ budget.
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Which of the following represents a short-term financial objective?
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List any two limiting factors when compiling budgets.
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Match the financial planning components with their types:
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Name one component of a financial plan that helps achieve long-term objectives.
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Historical figures in budgeting are always irrelevant.
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What is one of the key outputs of the financial planning process?
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A cash budget is generally prepared over a three-year period.
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What must be distinguished when compiling the cash budget?
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The cash budget allows an organization to forecast its short-term cash __________.
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What can a company expecting a cash surplus do?
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Match the components of the cash budget with their descriptions:
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The cash budget indicates the timing and sources of cash inflows and outflows.
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What are the two proforma financial statements mentioned in the financial planning process?
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Which of the following should be included in the cash flow projection from the cash budget?
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Credit purchases must be included in the cash flow projections.
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What is the key input to the cash budget?
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The eventual cash collection from debtors must be included as cash flows, while __________ sales should not.
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Which department is typically responsible for forecasting income?
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Match the following terms with their definitions:
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The cash flow projection is the same as an income statement.
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What should be included in the cash flow projection if fixed assets are purchased on credit?
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Study Notes
Financial Planning: The Cash Budget
- An organisation's goal is to maximize the wealth of its owners.
- The seven functions of the organisation must work together to achieve this goal: financial, communications, marketing, production, purchasing, human resources and information.
- Management functions (planning, control, organising, commanding and coordination) are used to coordinate activities in an organization to achieve its goal.
- Careful planning is vital to avoid failure.
- An integrated budget system can help implement planning and control.
- Budgets are a valuable tool for planning, controlling, commanding and coordinating.
Financial Planning and Control
- A budget is a financial plan outlining how an organization will achieve its goals.
- Budgets set specific goals and show how management plans to achieve them.
- Budgets compare actual and budgeted results with a focus on evaluating departments and the organization as a whole.
- Budget control ensures the organization stays on track to achieve its goals.
- Budget control identifies the causes of deviations and proposes corrective measures.
Successful Budget Implementation
- Successful budgets require:
- Sufficient background information.
- Clearly defined lines of responsibility with a distinction between line and staff functions.
- Support from all levels of management.
- A good organizational structure.
- A reliable financial and management information system.
Goals of a Budget System
- Maximize profitability by coordinating activities and reducing unnecessary actions within the organization.
- Ensure optimal utilization of cash resources and financing through forecasting cash needs.
Functions of a Budget
- Assigns tasks and provides authority to act.
- Functions as a communication tool with subordinates.
- Indicates external factors beyond management's control.
- Coordinates different divisions within the organization to achieve synergy.
- Provides control mechanisms.
- Identifies manager responsibilities within their divisions and across the organization.
Limiting Factors of Budgeting
- External and internal factors can limit activities.
- Limitations can include:
- Availability of production inputs (materials and labor).
- Location and transport.
- Availability of capital.
Using Budgets Effectively
- Effective implementation is key to the value of budgets.
- Budgets should be used daily to compare actual events with the plan, identifying deviations and implementing corrective measures.
- Zero-based budgeting, which starts from scratch and queries each expense, should be used strategically.
The Financial Planning Process
- Financial planning guides an organization's actions to achieve its objectives.
- Objectives can be long-term (e.g., maximizing owner wealth, sustainable profits) or short-term (e.g., efficient operations, liquidity).
- Organizations plan for return on assets (long-term) and liquidity (short-term).
- The five-year plan is a common example of a long-term financial plan, while a three-month cash budget is a common example of a short-term plan.
- Proforma Statements of Comprehensive Income and Statements of Financial Position form part of the financial planning process.
- The sales budget is the driving force of the financial planning process.
- The sales budget informs the production plan, personnel budget, inventory, factory overheads, operating expense budget, cash budget, and proforma financial statements (see Figure 8.1).
- Key outputs of the financial planning process are the cash budget and the proforma financial statements.
The Cash Budget
- Profitability does not guarantee sufficient cash to meet commitments.
- The cash budget helps plan future cash flow, forecasting expected cash receipts and payments for a specific period.
- The cash budget allows organizations to predict short-term cash needs.
- Businesses with a cash surplus can plan short-term investments, while those with a cash shortfall can arrange short-term financing.
- The cash budget usually covers a one-year period with monthly intervals, but can be prepared at shorter intervals depending on cash volume.
- The cash budget reveals the timing, extent, and sources of:
- Cash inflows.
- Cash outflows.
- Cash surpluses and shortages, their frequency, and duration.
Compiling the Cash Budget
- Distinguish between cash and credit sales.
- Consider credit policy for collecting credit sales, including discounts, and measures to curb bad debts.
- Review payment policy for trade payables.
- Factor in cash outflows from operating and long-term budgets.
- Make provisions for interest, tax, and dividend payments.
- The sales budget is the primary input for the cash budget.
- The marketing department usually forecasts income.
- Table 8.1 and Table 8.2 provide examples of cash budget formats (see tables in the text).
Understanding Cash Flow Projections
- Cash flow projections focus on actual cash inflows and outflows.
- Non-cash transactions like depreciation, credit sales, and credit purchases are not included in the cash flow projection.
- Credit sales collections and credit purchase payments are included when they actually occur.
- Fixed asset purchases are included in the cash flow projection.
- Provisions like taxes and dividends are not included, but actual payments are.
- Remember that cash collection from trade receivables might occur months (or even years) later than the sale was made.
Example: Cashstrapped Ltd
- Cashstrapped Ltd expects credit sales of R210 000, R250 000, and R240 000 for June, July, and August, respectively.
- Their actual sales for March, April, and May were R140 000, R180 000, and R190 000.
- This example can be used to practice preparing a cash flow projection considering factors like credit sales collections, trade payables, and potential cash shortfalls.
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Description
This quiz covers key concepts in financial planning and the importance of budgeting within an organization. Topics include management functions, the integrated budget system, and the role of budgets in achieving organizational goals. Test your knowledge on how financial planning and control contribute to overall success.
