Question

How could the cash budget be used when negotiating the terms of a bank loan?

Answer 1

Cash budget provides information about cash receipt and cash disbursement from all the operating activities. A company’s cash position determines how suppliers will be paid, how a banker will respond to a loan request, how fast a company can grow, as well as directly influencing dividends and profitability. The cash budget is one of the primary tools used in short-term financial planning in order to plan for cash flow.

Banks required cash budget while disbursing loan to company to determines the company’s future ability to pay debts as well as expenses. It is helpful in negotiating loans from Bank as it very efficiently convinces the lenders for the future cash flows and provides and lend credibility to the project. The lenders / banks would find it comfortable when they assured of future cash flows.

Therefore, Cash budget is required in management decisions and to easily get the bank loans to prove its creditability to pay the debt and good credibility helps in to negotiate in loans term