MEANING OF CASH BUDGET
A Cash Budget is a summary statement of the firm's cash
inflows and cash outflows over a projected period of time. It is a mere
forecast of the cash position of a firm for a definite period. It involves a
projection of future cash receipts and cash disbursements of over various time
intervals.
FUNCTIONS OF CASH BUDGET
The following are the main functions of a cash budget
1. Determining the
future cash requirements of the firm.
2. Planning for
financing the cash needs of the firm.
3. Exercising control
over cash and liquidity of the firm.
IMPORTANCE OF CASH BUDGET
A cash Budget is an extremely useful tool for management
maintaining control over cash position. It helps the management determine the
future cash needs of the firm; plan the financing of those needs and exercise
control over the cash liquidity of the firm. It enables the firm to meet its
commitment in time and at the same time prevent accumulations of unnecessary
surplus cash balance with it. The significance of the cash budget may be as follows:
Helpful in Planning:
It is helpful in planning the most efficient
use of cash. It enables the firm to arrange for the deficient of cash from
various possible sources to meet its obligations time, or to invest the surplus
money profitably without any threat to the liquidity of the firm.
Helpful in Determining Future Cash Needs:
A cash budget helps
the management in determining the future cash need of the firm, its timings and
the amount of cash well in advance. A cash budget, therefore, helps the
management in planning fat raising the necessary funds from the most profitable
source.at reasonable terms and costs.
Helpful in Exercising Control over Cash:
A cash budget also
helps management in exercising effective control over cash expenditures and cash
receipts. Thus, helps in maintaining the liquidity of the firm and also in
controlling the mishandling of cash.
Evaluation of Financial Performance:
The cash budget also helps
in evaluating the financial performance of the firm. This is done by comparing
the actual figures with the budgeted figures. Positive deviations will show
efficiency in the financial performance of the business.
Helpful in Testing the Productivity of Proposed Expansion Programme:
A cash budget is also helpful in testifying the productivity of proposed
projects or expansion programs. This is done by making a comparison between
the budgeted and actual figures of cash inflows.
Determination of Sound Dividend Policy:
The cash budget helps in
determining a sound dividend policy, as it plans for cash dividends to the
company shareholders in accordance with the liquid position of the company.
Basis of Long-term Planning:
A cash budget serves as an important
basis of long-term financial planning and is significantly helpful in
establishing coordination between functions such as sales, various finance credit, investment, working capital,
etc.
