If you were to examine the cash budgets of almost any organization, you would fi
ID: 2715770 • Letter: I
Question
If you were to examine the cash budgets of almost any organization, you would find distinct seasonal patterns of cash inflows and outflows. These patterns cause months during the year when almost every business is flush with cash, and other months in which things are extremely tight. Select an organization in which you are (were) employed, and describe the seasons of the year when this firm was flush with cash and the seasons when this firm was typically on a tight budget. Why did these times occur?
Explanation / Answer
Consider the business of manufacturing of airconditioners, the sales of airconditioners will be high in the summer and low in the rest of the year.
Maximum (nearly 80%) of sales will be from February to July that is 5 months and the remaining 20% of the sale in the remaining 7 months.
Thus, the cash flows for the peak season of 5 months will be high and the cash flows in the remaining periods are low.
As the turnover is high the cash flow will also be high and if the turnover is low the cash flow will also be low.