Cash Budget: Management Tool Homework Help

Cash Budget: Management Tool

A firm is well advised to hold adequate cash balances hut should avoid excessive balances. The firm has, therefore, to assess its need for cash properly. The cash budget is probably the most important tool in cash management. It is a device to help a firm to plan and control the use of cash. It is a statement showing the estimated cash inflows and cash ouillows over the planning horizon. In other words, the r.et cash position (surplus or dcflcicncv) of a finn as it moves from one budgeting subperiod to another is highlighted hy the cash budget.

The various purposes of cash budgets are:

(i) to coordinate the timings of cash needs It identifies the periods when there might either he a shortage of cash or an abnormally large cash requirement

(ii) it pinpoints the when there is likely to he excess cash

(iii) it enables a. firm which has sufficient cash to take advantage of cash discounts on its accounts payable. to pay obligations when due, to formulate dividend policy, to plan financing of capital expansion and to help unify the production schedule during the year so that the firm can smooth out costly seasonal fluctuations." finally,

(iv) it -helps to arrange needed funds on the most favourable terms and prevents the accumulation of excess funds. With adequate time to study his needs, the finance manager can select the best alternative. In contrast, a firm which does not budget its cash requirements, may suddenly find itself short of funds. With pressing needs and linle time to explore alternative avenues of financing, the management would be forced to accept the best terms offered in a difficult situation. 'These terms will not be as favourable, since the lack of planning indicates to the lender, that there is an orpanisational deficiency. The firm, therefore, represents a higher risk.'?

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