Cash budget definition
/What is a Cash Budget?
A cash budget itemizes the projected sources and uses of cash in a future period. This budget is used to ascertain whether company operations and other activities will provide a sufficient amount of cash to meet projected cash requirements. If not, the budget can be used to identify exactly when additional cash will be needed, and how much will be required. This document is extremely useful for the treasurer, who is responsible for ensuring that a business always has sufficient cash on hand to conduct its operations. Thus, the cash budget can be used to identify whether additional debt or equity funding will be needed, and the date by which it must be in the company’s bank account.
Contents of a Cash Budget
The inputs to the cash budget come from several other budgets. The results of the cash budget are used in the financing budget, which itemizes investments, debt, and both interest income and interest expense.
The cash budget is comprised of two main areas, which are Sources of Cash and Uses of Cash. The Sources of Cash section contains the beginning cash balance, as well as cash receipts from cash sales, accounts receivable collections, and the sale of assets. The Uses of Cash section contains all planned cash expenditures, which comes from the direct material budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget. It may also contain line items for fixed asset purchases and dividends to shareholders.
If there are any unusually large cash balances indicated in the cash budget, these balances are dealt with in the financing budget, where suitable investments are indicated for them. Similarly, if there are any negative balances in the cash budget, the financing budget indicates the timing and amount of any debt or equity needed to offset these balances.
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Example of a Cash Budget
Here is an example of a cash budget, showing the sources and uses of cash by week, and resulting in a net cash position.
The example shows a significant decline in incoming cash flows in the second week, following by a further decline in the third week that will likely require the organization to obtain additional financing. The same problem arises in the fourth week, so management will need to find at least $129,000 of financing before these needs arise. Alternatively, it will have to delay some cash outflows in order to keep from having a negative cash balance.
Other Cash Budget Issues
Cash balances may fluctuate considerably within a single accounting period, thereby masking cash shortfalls that can put a company in serious jeopardy. To spot these issues, it is quite common to create and maintain cash forecasts on a weekly basis. Though these short-term budgets are reasonably accurate for perhaps a month, the precision of forecasting declines rapidly thereafter, so many companies then switch to budgeting on a monthly basis. In essence, a weekly cash budget begins to lose its relevance after one month, and is largely inaccurate after two months.
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