Objectives and Importance Of Cash Budget

Objectives and Importance Of Cash Budget

What Is a Cash Budget ? A cash budget details the projected sources and uses of cash over a given time period. This budget is used to determine whether the company’s operations and other activities will generate enough cash to meet projected cash requirements. Management must find additional funding sources if this is not the case.

The cash budget receives inputs from several other budgets. The cash budget results are used in the financing budget, which includes investments, debt, and interest income and interest expense.

The cash budget is divided into two sections: sources of cash and uses of cash. The beginning cash balance, as well as cash receipts from cash sales, accounts receivable collections, and asset sales, are all included in the Sources of Cash section.

All anticipated cash expenditures, which originate from the direct materials budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget, are listed in the Uses of Cash section. It may also include line items for fixed asset purchases and shareholder distributions.

Objectives (Main Goals) of a Cash Budget.

A company’s cash budget is created to achieve the following goals:

  1. To project firm’s cash position in the future period.
  2. To predict cash surplus or deficit for the ensuing months.
  3. To permit planning for financing in advance of need. By indicating when cash will be required, the budget helps the management to arrange in advance bank loans or other short-term credits, to prepare for a sale of securities or to make other preparations for new financing.
  4. To help in the selection of proper source of financing cash requirements of the firm.
  5. To permit proper utilization of idle cash.
  6. To maintain an adequate balance between cash and working capital, sales, investments, and loans.
  7. To exercise control over cash expenditure by limiting the spending of various departments.

Importance of Cash Budget

 

  1. Estimate of Future Position of Cash:
  2.  Control over Cash Expenditure
  3. Formulation of Suitable Dividend Policy
  4. Helpful in Financial Planning
  5. Regulation of Other Budgets
  6. Helpful in Fulfillment of Seasonal Needs
  7. Justification of Cash Requirements

Short-Term Cash Budget vs. Long-Term Cash Budget

Cash budgets are usually divided into two categories: short-term and long-term. Short-term cash budgets are concerned with cash requirements for the coming week or months, whereas long-term cash budgets are concerned with cash requirements for the coming year or several years.

Utility bills, rent, payroll, payments to suppliers, other running expenses, and investments will all be included in a short-term cash budget. Long-term cash budgets are primarily concerned with quarterly and annual tax payments, capital expenditures, and long-term investments. Because long-term cash budgets need resources to be tied up for a longer period of time, they usually necessitate greater strategic planning and extensive analysis.

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