Question

You will need to read the following case and then you will need to respond to each question with a minimum of 3 sentences and you must include evidence from the chapter... not the case.

The Need for a Cash Budget

A small firm in Wichita, Kansas, specialized in the sale and installation of swimming pools. The company was profitable, but the owners devoted very little attention to the management of working capital. The company had never prepared a cash budget.

To be sure that money was available for payments as needed, the owner of the firm kept a minimum of $25,000 in a checking account. At times, this account grew larger, until at one time it totaled $43,000. The owner felt that this practice of cash management worked well for a small company because it eliminated all the paperwork associated with cash budgeting. Moreover, it had enabled the firm to always pay its bills in a timely manner.

Questions

1. What are the advantages and weaknesses of the minimum-cash-balance practice?
2. There is a saying, “If it ain’t broke, don’t fix it.” In view of the firm’s present success in paying bills promptly, should it be encouraged to use a cash budget? Defend your answer.

Answer 1

Answer A:

Using a minimum-cash balanced approach may be a safe manner for a business to form certain that it continuously encompasses a money balance in reserve. It guarantees that the business can continuously have a particular quantity of money assets to fall back on. This is often a really limiting and phantasmagoric approach to managing a business's capital although. Money is simply one element of capital. A business can be flush with money however liabilities that exceed that balance and have a negative capital balance have. Decent business must suppose on the far side a mental money framework and suppose broader to incorporate different ramifications to the profitableness and record stability.

Answer B:

The firm ought to be inspired to use a money budget so as to maximize its profits. It will then transfer excess money into fixed cost accounts until the cash is required to pay bills. The owner of this firm is also terrified of attempting a money tool with that he or she has no expertise, however, money budgeting needn't be complicated or heavy.