Explain the purpose and benefits of budgeting, prepare a cash budget showing receipts, payments and closing balance, and use budget variances and internal controls to monitor performance

What this dot point is asking

SCSA wants you to explain why businesses budget, prepare a cash budget with a running balance, interpret variances, and link budgeting to internal control over cash.

The purpose and benefits of budgeting

Benefits include forcing managers to plan ahead, coordinating different parts of the business, setting targets that motivate staff, allocating resources, and providing a benchmark for control.

Preparing a cash budget

A cash budget lists:

• Cash receipts (cash sales, collections from debtors, capital introduced, loans)
• Cash payments (payments to creditors, wages, expenses, asset purchases, loan repayments)
• Net cash flow (receipts less payments)
• Opening balance, then closing balance carried to the next period

Variances and control

Internal control over cash

Because cash is easily misappropriated, businesses use internal controls such as dividing duties so no one person handles a transaction end to end, banking receipts daily and intact, paying by authorised methods, and reconciling the bank statement regularly. A cash budget supports control by flagging when balances stray from plan.

Acting on what the cash budget reveals

The value of a cash budget is in the decisions it enables before a problem arrives. A forecast shortfall lets management arrange an overdraft, delay a discretionary purchase, accelerate collections from debtors, or negotiate longer terms with suppliers, all in advance rather than in a crisis. A forecast surplus is just as useful: idle cash earns little, so the business might repay debt early, invest short term, or bring forward a planned asset purchase. Because the closing balance of one period becomes the opening balance of the next, the budget shows the trajectory of cash, not just a single snapshot, which is why a shrinking surplus across consecutive months is an early warning even while the balance is still positive. The cash budget is a planning tool first and a control benchmark second: once the period passes, actual cash is compared against it to produce variances that feed into the next plan.

Timing: the heart of a cash budget

The skill a cash budget tests is timing. A sale made in one month may be collected in the next, or split across several months under a credit policy, so the receipt appears in the cash budget when the cash actually arrives, not when the sale is recorded. The same applies to payments: goods bought on credit are paid for when the supplier's terms fall due. A common exam scenario gives a collection pattern (for example 60 per cent in the month of sale and 40 per cent the following month) and asks you to phase the receipts accordingly. Getting this timing right is what separates a cash budget from an Income Statement. The running balance then carries from one period to the next, so an error in one month's timing flows through every later closing balance, which is why careful phasing of receipts and payments earns the marks.