Question

What is the purpose of a cash budget in an organization?

Answer 1

Question summary : Purpose of Cash Budgets

Answer : Cash Budgets are typically prepared to know the inflows and outflows of cash in a month/ week/fortnight or sometimes annually

1. By estimating inflows and outclows of cash, the company can know whether there is an expected cash shortage or surplus cash . Accordingly it can make funds arrangements to meet the shortfall of cash for running business operations. It can also plan short term investments if there are surplus funds so that cash does not remain idle and unproductive.

2. It serves as a tool for Financial Control. Actual cash positions can be compared to budgeted statements and monitored for any discrepanies

3. It helps to maintain the creditworthiness of the business as payments will not be disrupted. if cash budgets are prepared, Company will not be in a position where it finds itself without funds required to pay its creditors or operational expenses.

4. In case of estimated shortfall in cash , It also helps to determine for how longs funds need to be made available to the business, its procurement and repayments planning.

5. It also aids in the planning of capital expenditure and capital investments depending upon the availability of funds