|
|
By drawing up a budget the business
can spot potential problems before they happen.
Is the business in danger of underperforming? Does the business need to build up sales volumes more rapidly or increase selling prices? Are the forecast costs too high and are there areas where costs can be cut back? Does the
cash budget show that the business will require an overdraft or will it exceed a current overdraft?
In what areas can the business improve its
cash flow? Can sales income be collected quicker by for example, improving credit control? Can payments to suppliers be delayed or would this have adverse effects, such as loss of discounts or damage good relationships
with suppliers? Can any planned capital expenditure be delayed or obtained using a finance option? Can alternative sources of finance be found, such as agreeing an overdraft facility, invoice discounting, asset financing
or agreeing a term loan?
Is the business in danger of overtrading? The higher the sales grow, the more cash the business will need
to finance raw materials and wages. If the level of sales increases substantially in a short time
span, the business may simply run out of cash to pay for more materials. Without
being able to obtain new finance the business would have to manage demand by increasing prices or rationing supply.
There is no point in gaining large orders,
often at reduced prices, if as a result the business runs out of cash and goes into liquidation.
|
