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ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations

A company's cash budget shows a forecast overdraft of 80,000 in month 4, exceeding its agreed facility of 50,000. Which response is most appropriate for the finance function?

The finance function should act in advance, for example by negotiating a higher facility, collecting receivables faster or deferring non-essential payments. The cash budget exists to highlight shortfalls early; manipulating figures or delaying recording does not change actual cash, and facilities are not approved automatically.

  1. AIgnore the forecast because overdrafts are normally approved automatically
  2. BDelay recording the related expenses until the facility is available
  3. CTake action in advance, such as negotiating a higher facility, speeding up receivable collection or deferring non-essential paymentsCorrect
  4. DIncrease budgeted sales figures so the forecast shows a smaller shortfall

Explanation

The purpose of a cash budget is to identify shortfalls early so corrective action can be taken. Negotiating more finance, accelerating collections or deferring discretionary payments address the 30,000 excess. Altering sales figures or delaying recording is manipulation and does not change real cash, while assuming automatic approval is unsafe.

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