Question

In: Accounting

Now that a business has prepared it budget for the next three months, and the budget...

Now that a business has prepared it budget for the next three months, and the budget indicated that there will be cash shortage (negative cash balance at the end of the month, mainly due to the large total cash payments in the month than the total cash receipts) in the second month.What actions should the managers take when he is presented with this information?

What actions should the managers make if in the third month, there will be a cash surplus (the opposite of cash shortage)?

Solutions

Expert Solution

Budget represents the estimated receipts and payments of an organization. It helps an organization in planning and managing its money effectively. It can be prepared for different period of time depending upon the needs of organization (say budget for 3 months or 6 months or 1 year etc).

Here, Manager has estimated that there would be lack of funds at the end of second month however there would be a surplus at the end of third month. Thus, at second month payments>receipts.

Following actions can be taken:

1. Thus, Manager can defer some payments to be made in second month to third month so as to maintain cash balance if possible.

2. One of the most beneficial option for the Manager is to start keeping some aside or make a provision for the expenditures to be incurred in second month.

3. Manager can also reorganize the budget by excluding some not so important purchases in second month.

4. Another option which a Manager has to defer some purchases planned to be made in second month to consecutive months.

5. Retained earnings of business, if any, can be utilized in second month then again in the third month when there would be a surplus, money taken from retained earnings can be transferred back.


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