The goal of a "cash budget" is to calculate required cash inflows and outflows and determine time periods when cash excesses or shortages are expected. This helps a company avoid a cash crisis and to use its cash funds rationally. Thus the cash budget is a detailed spreadsheet of expected cash inflows and payments over a given period.
- It will enable the company to make timely decisions about whether and how much money the company needs to borrow.
- The "cash budget" is a part of a company's "master budget". Data from other budgets, including: sales, production, direct labor, etc. are used to develop the cash budget.
- The reliability of the data put into the cash budget depends on projections and forecasts; the most important are the sales forecast and the accounts receivable collection period.
Developing the cash budget
- The cash budget must include all cash inflows and payments from the three types of activities: operating, investing, and financing.
- First, it is important to estimate inflows and outflows for operating activity since the results of planning operating activities will determine investment needs and financing requirements.
- Cash outflow planning for investing activities are based on expected capital acquisitions and other investment plans (e.g., share purchases). The cash inflows from investing activities are based on expected cash receipts from the sale of capital assets and other long-term investments.
- Cash flow planning for financing activities reflects the company's expectations with regard to the issuance or repurchase of its own shares or the borrowing or repayment of bank loans.
Inputs to the cash budget
When planning the cash budget, the following factors must be taken into account:
Analysis of cash flow
Analysis of collection period of accounts receivable
Analysis of accounts payable
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