a. i) A cash budget is a detailed plan that outlines the expected cash inflows (cash receipts) and cash outflows (cash payments) over a specific planning period. This planning period is further broken down into shorter intervals, such as weeks, months or quarters.

The cash receipts and payments are forecast or planned for each of the sub-divisions of time.

ii) Uses of a cash budget are as follows:

 To estimate the expected cash receipts and payments over the planning period.

 To determine whether there will be a cash shortage or surplus at any point during the period.

 In the event of a projected cash shortage, the budget helps in planning corrective measures, for example, by planning to defer some purchases of non-current assets or approaching the bank for a larger bank overdraft facility; and

 To track actual cash flows during the planning period by comparing actual cash flows with the budgeted cash flows.

b. i) The objective of good cash management is to maintain a sufficient cash balance to meet liabilities as they fall due while avoiding holding excessive cash that could otherwise be invested in the organization’s wealth-creating assets.

ii) The objectives of cash flow forecasting, like the purposes of a cash budget, are to:

 confirm that the entity has adequate cash to meet its immediate payment obligations as they fall due.

 identify periods of potential cash shortages so that financing can be arranged.

 identify whether there will be a surplus of cash in a given period so that arrangements can be made to have the surplus cash invested; and

 assess whether operating activities are generating the expected level of cash inflows.

c. Reasons why investors usually avoid investing in the equity of private companies include the fact that the shares are:

i. Not traded on a stock exchange.

ii. Difficult to value; and

iii. Difficult to sell when the shareholder wants to cash in the investment.

d. i. Concepts of relevant cost and opportunity cost

Relevant costs are future cash flows that will arise as a direct consequence of the decision under consideration. It excludes sunk costs, non-cash expenses, or costs that will be incurred regardless of the decision.

ii. Opportunity costs

Opportunity costs are the benefits forgone by using assets or resources for one purpose, instead of using them in the most profitable alternative way. Opportunity costs are commonly measured as contribution forgone but might also be measured as a present value in DCF analysis. When resources have more than one alternative use and are in limited supply, their opportunity cost is the contribution forgone by using them for one purpose and so being unable to use them for another purpose.

e. How to identify relevant costs

i. Relevant costs are cash flows. Any items of cost that are not cash flows must be ignored for decision-making. For example, depreciation expenses are not cash flows and must always be ignored.

ii. Relevant costs or benefits are future cash inflow or outflows. Costs that have already been incurred are not relevant to a decision that is being made now. For example, a company might incur costs on an initial investigation. The investigation costs are irrelevant because they have already been spent. The cost should not affect the decision to proceed with or abandon the project.

iii. Relevant costs are also costs that will arise as a direct consequence of the decision, even if they are future cash flows. If the costs will be incurred whatever decision is taken, they are not relevant to the decision. For example, in a “make-or-buy” decision, the cost of raw materials is relevant if it arises only in the “make” option. However, the salary of the procurement manager, which will be paid regardless of whether the company makes or buys, is not relevant.