Question

• How is the cash budget is constructed, and how is it used in working capital management.

Answer 1

Cash Budget is generally constructed after the budget for operating expenses and capital expenditures are prepared. Operating budgets include sales expenses, manufacturing expenses, SG&A expenses. The initial step in cash budget is to add the present years cash inflows to the beginning of the year cash balance. This would provide the cash available. Cash outflows for the period are then identified and subtracted from the cash available for arrive at the cash balance before financing. If the balance is below the company's required cash, then the financing section will show the needed borrowings to match the required cash. This section also shows the amount of debt needed to be repaid that includes the interest repayment.Thus, the cash balance before financing is balanced out of the financing section. This gives rise to ending cash balance.

The cash budget is a very important part of working capital management as it helps the management ascertain the liquidity especially the cash needs of the organization. This helps in effective planning and helps the organization tide over any liquidity crisis.