- 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.
A cash budget helps to ensure that you organization will have the necessary financial backing it needs in order to function and be successful throughout the budget period. Cash budgets can broken down into months or quarters to reflect the cash flow.
Steps in preparing a cash budget are to:
Determine the beginning cash balance. How much cash will be available at the beginning of the period?
Add Receipts. Determine the expected receipts or collections from customers that will flow into the cash account each period.
Deduct Disbursements. Determine how much cash will be needed to cover disbursements, cash payouts during the period. This could include payment for materials, payroll, taxes due, etc.
Calculate the cash excess or deficiency. Subtract the disbursement from the sum of the beginning cash balance and the receipts expected during that period.
Determine financing needed. Subtract the disbursement from total cash available. If there is cash excess, then financing of operations may be covered by the available cash.
Establish the ending cash balance. The ending cash balance becomes the beginning cash balance for the next period. This includes the receipts and loans less the disbursements and financing costs.
(2007 Harvard Business School Publishing).
According to the chapter readings, there are five cash management roles for the entrepreneur.
Cash finder. Make sure there is enough capital to pay all present and future bills.
Cash planner. Make sure your company’s cash is used properly and efficiently. Keep track of your cash.
Cash distributor. This role requires you to control the cash needed to pay the company’s bills and the priority and the timing of those payments.
Cash Collector. Your job is to make sure your customers pay their bills on time.
Cash conserver. This role requires you to make sure your company gets maximum value for the dollars it spends.
Source: Based on Bruce J. Blechman, “Quick Change Artist,” Entrepreneur, January 1994, pp. 18–21.
- 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.
Techniques for avoiding a cash crunch are:
Barter, the exchange of goods and services for other goods and services, is an effective way to conserve cash.
Avoid Nonessential Outlays. Smart entrepreneurs spend cash only when it is necessary.
Look for Simple ways to cut cost. Allowing expenses to creep u p over time is a common tendency in any business, but smart entrepreneurs are always on the look out for ways to cut costs and to operate more efficiently.
Negotiate Fixed Loan Payments to Coincide with Your Company’s Cash Flow Cycle. Many banks allow businesses to structure loans so that they can skip specific payments when their cash flow ebbs to its lowest point.
Buy Used or Reconditioned Equipment. Many shrewd entrepreneurs purchase used or reconditioned equipment, especially if it is “behind the scenes” machinery.
Hire Part-Time Employees and Freelance Specialists Whenever Possible. Hiring part-timers and freelancers rather than full time workers saves on both the cost of salaries and employee benefits.
Outsource, conserve valuable cash by outsourcing certain activities to businesses that specialize in performing them rather than hiring someone to do them in-house.
These are just a few of the many ways to avoid a cash crunch when having a business. Another suggestion is to make sure the you plan ahead for slow business on off peak season.
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