Difference between cash and flexible

Cash budget is a budget or forecast which predicts the cash position of an organization
in terms of receipts and payments. The importance of the cash budget lies in the fact
that this tells an organization on how and when to plan for cash surpluses or deficits.

Flexible budget is a budget in which the expenses adjust to the level of sales or output -
in contrast, a fixed budget is one which does not vary with the level of sales or output.

Difference between relevant and irrelevant

Relevant cost is a term that explains costs that are incurred when making business
decisions since they affect the future cash flows. The rule here is to consider the costs
that will have to be incurred as a result of proceeding with the decision. The concept of
relevant cost is used to eliminate unnecessary information that complicates the decision
making process.
Irrelevant costs are the costs that are not affected by making a business decision since
they do not affect the future cash flows. Irrespective of whether the decision is made or
not, these costs will have to be incurred. Below mentioned are the types of irrelevant
costs

Objectives of cash budget

 A cash budget details a company's cash inflow and outflow during a
specified budget period, such as a month, quarter or year.
 Its primary purpose is to provide the status of the company's cash position at any
point of time.
 It also helps in analyzing budget-versus-actual variances in cash inflow and outflow.
Objective of Flexible budget
a) Provide management slack in their budget 
b) Eliminate fluctuations in production reports
c) Compare actual and budgeted results at various level of activity
d) Make the annual budget process more efficient.

Advantages of flexible budget

1. Seasonal Expenses
Winter coats cost more than swimsuits and you don’t take beach vacations
in the fall. These are examples of seasonal expenses that do not recur
throughout the year. Flexible budgeting can be used to adjust for these
large purchases when they occur without requiring any adjustments in
following months.
2. Irregular Earnings
Holiday bonuses often recognize a year of work but they also come at a
convenient time. Many families have increased expenses at this time of
year which is also why many employers choose to give out bonuses when
they do. Flexible budgets incorporate these irregular payouts in a way that
allows them to be used when the funds are most needed.

Disadvantages of flexible budget

1. Confusing
Budgets are simple because they provide one figure within which someone
must remain. Flexible budgets require more planning in order to track
expenses and adjust for any differences between periods. A range that
changes over time can make the budgeting processing overly confusing for
some users and therefore reduce the odds that they will successfully follow
it.
2. Enables Cheating
The rules of a traditional budget are straightforward: don’t spend more than
the limit. Flexible budgets complicate things by include more rules that can
easily be bent or broken by someone who is struggling to stay within the
boundaries.
3. Less Discipline
The whole point of a flexible budget is to make it easier to adhere to,
however, by not following the same rigid program every month, such
systems are unlikely to foster the same discipline or long term habits as
more traditional alternatives.

List of the Advantages of a Cash Budget

1. You can avoid debt.

If all you’re allowed to do is spend the cash you have, then you avoid debt.
Once you run out of cash, you can no longer spend anything. That does
mean you must set aside cash for emergency situations, otherwise you
may find yourself in an uncomfortable situation. If your hot water heater
goes out and you don’t have enough cash available to replace it, then you’ll
be taking cold showers until you do.

2. You are forced to budget better.

A cash-only budget forces households and businesses to budget better.
There are no “outs” with this type of budget. You either make ends meet
and live comfortably or you don’t and suffer the consequences. It is a
process which requires frequent attention to details, tracking specific
spending habits, and proactive management to ensure that there is always
enough money available to take care of every need.

3. You become more resourceful.

When you’re using a cash budget, you must find efficiencies that you may
not seek out if you are using other financial resources and tools. You must
find ways to save cash, which means you must eliminate all waste from
your budget. Businesses find that when they are watching every penny (or
equivalent) that comes in and out with their cash flow, they can control
spending better and find new ways of growth. You get to see where all your
cash is going when you use this type of budget.

4. You stay in-touch with reality.

People don’t look at their bills because it makes them feel like they don’t
need to pay it. With a cash budget approach, you’re given a heavy dose of
reality. You must look at your financial statements, your bills, your
obligations, and every expenditure that you make. There is no other way to
determine if you’re overspending on purchases. Because your supply of
cash is limited, overspending limits your resource access. You’re forced out
of the position of being able to purchase something which you may not be
able to afford at the moment.

5. You can quickly identify potential deficits.

When you are operating off of a cash budget, then you can quickly
determine if you’ll have enough cash to meet obligations. If not, then you’ll
be able to trigger a corrective action to ensure the budget estimates can be
met. Being cash-only does not limit the ability to borrow money from a
business perspective. It’s better to borrow to pay taxes or meet a monthly
payroll, especially if the cash shortfall is a temporary issue.

Disadvantages of cash budget

1. It creates a danger of theft.

You must have plenty of documentation that tracks your cash movements
to protect yourself against theft. Cash is the easiest asset to steal, partially
because it is not very easy to trace. Although you don’t need to list every
serial number of every bill you send outside of your home or business, it is
helpful to sign-out specific amounts when the cash must travel to a new
location. That will give you a paper trail that can be used to potentially
make an insurance claim should something happen.

2. It limits your spending power.

Many businesses today have stopped accepting cash for certain activities.
You may find it to be impossible to rent a car without having at least a debit
card available to access your cash resources. Some hotels will not accept
a reservation without a debit or credit card number. If you switch to a cash-
only budget, you may find it difficult to access some of the services your
home or business may require. That, in turn, limits your overall productivity.

3. It limits where you spend your money.

If you show up at a store to purchase something in cash, most will accept
the transaction without a second thought. If you want to make that
purchase online, however, cash is not going to be a suitable option. Most,
but not all, geographic locations have eliminated the cash on-delivery
(COD) process, requiring payment up-front for products or services. Trying
to process a cash payment on an e-commerce website is almost
impossible to do.

OPERATING COSTS

Operating costs are expenses associated with the maintenance and

administration of a business on a day-to-day basis. The total operating cost for
a company includes the cost of goods sold, operating expenses as well
as overhead expenses. The operating cost is deducted from revenue to arrive
at operating income and is reflected on a company’s income statement.
OPPORTUNITY COSTS
When an option is chosen from alternatives, the opportunity cost is the "cost" incurred by not
enjoying the benefit associated with the best alternative choice. The New Oxford American
Dictionary defines it as "the loss of potential gain from other alternatives when one alternative is
chosen.

RELEVANT COST

Relevant cost is a managerial accounting term that describes avoidable costs

that are incurred only when making specific business decisions. The concept
of relevant cost is used to eliminate unnecessary data that could complicate
the decision-making process. As an example, relevant cost is used to
determine whether to sell or keep a business unit. The opposite of a relevant
cost is a sunk cost, which has already been incurred regardless of the
outcome of the current decision.
Assume, for example, a passenger rushes up to the ticket counter to purchase
a ticket for a flight that is leaving in 25 minutes. The airline needs to consider
the relevant costs to make a decision about the ticket price. Almost all of the
costs related to adding the extra passenger have already been incurred,
including the plane fuel, airport gate fee, and the salary and benefits for the
entire plane’s crew. Because these costs have already been incurred, they are
sunk costs or irrelevant costs. The only additional cost is the labor to load the
passenger’s luggage and any food that is served mid-flight, so the airline
bases the last-minute ticket pricing decision on just a few small costs.

Types of Relevant Cost Decisions

Continue Operating vs. Closing Business Units
A big decision for a manager is whether to close a business unit or continue to
operate it, and relevant costs are the basis for the decision. Assume, for
example, a chain of retail sporting goods stores is considering closing a group
of stores catering to the outdoor sports market. The relevant costs are the
costs that can be eliminated due to the closure, as well as the revenue lost
when the stores are closed. If the costs to be eliminated are greater than the
revenue lost, the outdoor stores should be closed.

Make vs. Buy

Make vs. buy decisions are often an issue for a company that requires
component parts to create a finished product. For example, a furniture
manufacturer is considering an outside vendor to assemble and stain wood
cabinets, which would then be finished in-house by adding handles and other
details. The relevant costs in this decision are the variable costs incurred by
the manufacturer to make the wood cabinets and the price paid to the outside
vendor. If the vendor can provide the component part at a lower cost, the
furniture manufacturer outsources the work.

Cash budget
A cash budget is a budget or plan of expected cash receipts and disbursements during the
period. These cash inflows and outflows include revenues collected, expenses paid, and
loans receipts and payments. In other words, a cash budget is an estimated projection of
the company's cash position in the future.
Purchase budget

Purchases budget. February 07, 2018. A purchases budget contains the amount of

inventory that a company must purchase during each budget period. The amount stated in
the budget is the amount needed to ensure that there is sufficient inventory on hand to meet
customer orders for product
Production budget
he production budget calculates the number of units of products that must be
manufactured, and is derived from a combination of the sales forecast and the planned
amount of finished goods inventory to have on hand (usually as safety stock to cover for
unexpected increases in demand).
Sales budget
Sales budget is a financial plan, which shows how the resources should be allocated to
achieve forecasted sales. The main purpose of sales budget is to plan for maximum
utilization of resources and forecast sales. The information required to prepare a sales
budget comes from many sources.
Inventory budget
The ending finished goods inventory budget calculates the cost of the finished
goods inventory at the end of each budget period. It also includes the unit quantity of
 finished goods at the end of each budget period, but the real source of that information is
the production budget.
Master budget
The master budget is the aggregation of all lower-level budgets produced by a company's
various functional areas, and also includes budgeted financial statements, a cash forecast,
and a financing plan

Master Budget Problems

When a company implements a master budget, there is a strong tendency

for senior management to force the organization to closely adhere to it by
including budget goals in employee compensation plans. Doing so has the
following effects:

 When compiling the budget, employees tend to estimate low sales

and high expenses, so that they can easily meet the budget and achieve
their compensation plans.

 Forcing the organization to follow the budget requires a group of

financial analysts who track down and report on variances from the plan.
This adds unnecessary overhead expense to the business.

 Managers tend to ignore new business opportunities, because all

resources are already allocated toward attaining the budget, and their
personal incentives are tied to the budget.

Thus, enforcing a master budget can skew the operational performance of

a business. Because of this problem, it may be better to employ the
master budget as just a rough guideline for management's near-term
expectations for the business.

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