This article throws light upon the three approaches by a management auditor. The approaches are: 1. Cash Forecasting 2. Cash Budgeting 3. Cash Planning.
Management Auditor: Approach # 1. Cash Forecasting:
(1) The methods adopted for forecasting cash.
(2) The determining factors considered for expected payments and receipts for a chosen period.
(3) The extent of any seasonal or intermittent fluctuations in receipts and payments.
(4) The basic elements or classified groups of accounts and the aggregate/individual commitments for payments and the aggregate/individual expectations in real terms for cash receipts.
(5) The length of period chosen, e.g. weekly, four-weekly, quarterly etc.
(6) The use of the ‘Balance Sheet Cash Forecast’ or ‘Profit Cash Forecast’, with a view to ascertaining the final position after the planned operations have been carried out for the periods chosen. This is necessary and would be a worthwhile exercise as a means of checking the accuracy of the final balance shown by the ‘Payments and Receipts Cash Forecast’.
(7) In case of the new or expanding business, a long-term cash forecast is inevitable for expansion to take place. So, the plan of approach should embrace the following aspects in particular:
(a) Cash needed for plant extension or modernisation, advertisement, expansion of labour force, and for other essentials.
(b) Possible sources to meet these needs, e.g. by issue of shares, debentures, or by loan or overdraft.
(c) The credit policy of the Government, and its direct and indirect controls through the Banks and other financial institutions.
(d) The various forecasts relating to sales, production and element-wise expenses.
For quantitative approach and analysis of the cash management problem, the management auditor can make use of the following formats (illustrated below) with the objective of offering recommendations for corrective actions and solutions:
Management Auditor: Approach # 2. Cash Budgeting:
This involves estimation of cash receipts and payments for a future period, after having due consideration of the expected conditions/events and the overall budget plan. The study of the cash forecast discussed before may reveal that there is a shortage or excess of cash funds between the different control periods. So, necessary adjustments have to be made to convert the cash forecast into Cash Budget.
The management auditor, in such circumstances, can advise on the following lines:
(1) Regulating the volumes of production, inventory and sales.
(2) Adopting a policy of short-term borrowings in exceptional cases.
(3) Policy changes in prices and discounts to speed up the ‘inflow’ of cash.
(4) Policy changes in the credit terms allowed by creditors to restrict the ‘outflow’ of cash.
(5) Leasing policies instead of buying so as to conserve cash resources.
(6) Policy changes from the outright purchase scheme to the hire purchase scheme to control the ‘outflow’ of cash of a larger amount, etc.
The management auditor should carefully study:
(1) The figures in absolute amounts that are presented in the Cash Budget; and
(2) The amounts in the Cash Budget to ensure that these become a part of the integrated budget plan.
Management Auditor: Approach # 3. Cash Planning:
The management auditor can also make use of the ‘Source and Application of Funds’ concept in formulating policy as well as controlling cash resources.
Typical aspects which deserve his attention, in this area, may include the following among others:
(1) How much finance is coming from:
(a) External sources, and
(b) Internal sources or retentions?
(2) How are the funds being employed?
(3) Whether depreciation is adequate for the type of business, etc..