Cash flow forecasts and budgetary estimates are very important in the decision making process for any company because they foresee the financial position of the company putting all influencing factors into consideration. Budgetary estimates importance is indicated through variance analysis which forms the basis for decisions such as increasing advertisement expenses, checking on the level of wastage among other factors. The budget is also important in that it helps in measuring of performance and in forward planning thus a crucial factor in future decisions. A crucial aspect of budgets is the budgetary control system which is a technique that is used to compare the actual results and budgeted results (Singla, 2009). It usually has four types of responsibility centers namely; revenue, expense, profit and investment centers which analyze each of the variances. For instance Zurich which part of its business is offering insurance puts lots of emphasis on the budgeting and estimation of insurance premiums due to the fact the profits in the insurance industry are only determined in the long run.
Cash flow accounting on the other hand plays a very crucial part in decision making because it is the only way of ensuring an organization remains solvent (Kalb, 1992). This involves the analysis of three key cash flows; cash flow into the business, cash flow out of the business and the net cash flow which is the difference between money flowing in and money flowing out which should be positive for the organization to remain solvent. Another important aspect is the cash flow forecast which is a forecast of the cash that is coming into and cash flowing out of the business which should always be positive for a specific project to be approved as viable (Kalb, 1992). A cash flow budget is the other aspect which is a plan to generate more cash coming into the business than cash going out of the business. For instance in a supermarket chain such as Sainsbury the main cash inflows are sales while the cash outflows are supplies and overhead costs for running the stores. Therefore the sales ought to be always more than the sum of supplies and overheads.
Kalb, I. S. (1992). Finance . Structuring your business for success (p. 303). Los Angeles: K&A Press.
Singla, R. K. (2009). Controlling: Concept and process. Business management (p. 133). New Delhi: V K Enterprises.
The benefits of budgetingA Zurich case study. (n.d.). Introduction. Retrieved June 19, 2014, from http://businesscasestudies.co.uk/zurich/the-benefits-of-budgeting/introduction.html#axzz354cDMYu1
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