A cash budget is an attempt to estimate the cash inflows and outflows for a specific future period. The use of a cash budget is a crucial tool for the financial manager in achieving liquidity goals. Its primary purpose is to discover whether the available cash at any point in time is insufficient to pay bills and meet financial obligations when they are due. The receipts are compared to the payments to project the financial outcome at the end of the selected time period.
How is the cash budget used?
Planning for Borrowing:
The use of a cash budget helps the financial manager identify the periods where outflows exceed inflows. This reveals any cash shortfall that needs to be addressed by external funding. Knowing the amount and timing of a cash deficit in advance gives the financial manager ample opportunity to search for the best sources of funding to meet the company’s cash needs.
Planning for Loan Repayment:
The cash budget not only helps determine how much money needs to be borrowed but also identifies the appropriate repayment schedule. The importance of the cash budget is evident in showing whether the company can begin loan repayments as scheduled, assuming things go according to plan. Additionally, loan repayment planning helps form borrowing strategies and provides lenders with some guarantees regarding repayment.
Planning for Payments to Shareholders:
The cash budget clearly shows that withdrawing any portion of the profits during months when borrowing has occurred could exacerbate cash flow problems, especially when high profits are expected. The cash budget helps anticipate future cash availability, but it's essential that financial operations are timed appropriately to avoid liquidity issues.
Planning for Effective Use of Cash:
The financial manager ensures that cash is utilized efficiently to generate the highest possible benefits without negatively affecting liquidity. Here, the cash budget is vital as it determines the best time to settle bills and improve the company’s financial position, all while focusing on cost savings.
Courses on Financial Management and Cash Budgeting at the British Academy for Training and Development
The British Academy for Training and Development offers various diploma and master's programs in financial management. Regarding the significance of cash budgeting, the academy provides specialized courses on creating and implementing budgets and modern financial management practices. These courses equip participants with the skills needed to manage cash flow effectively and plan for future financial success.
