Question

Managing Cash Flow
Please respond to the following with a 250-300 word response:

Analyze the steps involved in preparing a cash budget and determine which steps presents the greatest number of obstacles to the greatest number of small businesses. Explain your rationale.

Analyze the steps involved in avoiding a cash crunch and make at least one additional recommendation for doing so. Provide specific examples to support your response.

Answer 1

Steps in Cash Budgeting:

Step 1: Determine/Analyze cash carry forward from previous year/financial cycle.

Step 2: Add cash receivables during given year or month (small businesses usually works on monthly cycle for cash flows).

Step 3: Deduct all the expenses & disbursements which includes raw material cost, payouts, taxes etc.

Step 4: Calculate the cash status after the given period i.e. whether cash is excess after subtracting expenses from receivable or is it cash deficiency.

Step 5: Determine the financing method if cash is deficient, i.e. expenses are greater than receivables because if receivables are greater than financing can be managed internally.

Obstacles for small businesses:

In small businesses step 2 & 3 are always dynamic & changes almost with every given period, this is because its really hard to maintain a stable receivable & expense cycle and small businesses always tries to expand thus faces situation of cash deficiency most of the time, which creates trouble to maintain production & buy raw material and other expenses.

Expect for this, Step 5 is biggest challenge, as sources of financing for small businesses are most important & critical. They always try to get finance at lowest interest rates & which is easily available (for example without collateral). Thus, if a firm manages to arrange for its financing method then it can easily manage other steps of cash flows.

Example: A tire making factory require huge cash for raw material & other operational expenses, also its receivable cycle is longer as payment will come only after sell of finished goods, thus financing in such industry is very important & critical, thus a working capital loan is best option in such cases.