How does a business prepare and use budgets to plan and control its operations and cash flow?
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
WACE Year 12 Accounting and Finance Unit 4 on budgeting: the purpose and benefits of budgets, preparing a cash budget with receipts, payments and closing balance, interpreting favourable and unfavourable variances, and the role of internal control in safeguarding cash.
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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.