Understanding cash budgeting
The most efficient cash flow management tool is Cash Budgeting. In general, a budget is a plan. Managers and owners use it as a tool to achieve their company goals over a specific period of time. It is one of the most primary tools used for short-term financial planning virtually planning to cash flow. It is usually generated on a monthly basis. A flexible cash budget allows the manager to foresee short-term financial opportunities and requirements for the business. One month the business may left with surplus cash and may decide to save the money in market funds or securities or may decide to take advantage of a bargain price in the market place. At a different point of time, they may face a shortfall in funds and decide to withdraw money from the accessible savings or may apply for a short-term loan to fund their needs.
The preparation of a cash budget is important for any establishment, small or large. Some small entities may survive without cash budgeting for a time period, but most savvy businesses realize its importance better. There are other types of cash budgets that can be prepared like pro forma financial statements, but a typical cash budget is a management plan meant for the most crucial factor of a company’s viability, i.e., its cash position. The cash position of a company exhibits its supplier’s payment design, how a financer will respond to a loan request and directly influence dividends leads to owner’s profitability and equity.
Source: Financial Decision-making: A CPA/Attorney’s Perspective by David L. Fraley (PSI Research/Oasis Press, 1998
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