Question

cash budgets

Answer 1

CASH BUDGETS It is a written estimation of cashflow i.e estimation of cash reciept and cash payements in a business for a specific period of time. It is a primary tool in cash planning.The financial manager uses the cash budget to determine whether the company needs to bring in more revenue or defer it. It is a budget which is prepared under financial budget.

OBJECTIVES OF CASH BUDGETS

1.Cash budgets are prepared for proper utilisation of idle cash.

2.To excercise control over cash and liquidity of the firm.

3.To maintain balance between cash,working capital,loans and investments

4.To have better understanding of cash as well as credit transactions.

5.To have a regular watch on the cash flows and doing alteration according to the requirement for better performance.

There are mainly three methods of preparing cash budgets.

1. Receipts and payments method- It is the most simple and poplular method.In this method all estimated cash receipts are added to the opening balance of cash and all estimated cash payments are deducted from this to arrive at the closing balance of cash.it is used in forecasting the short term cash position

2.Balance Sheet method- This method is similar to that of profit and loss adjustment method.a budgeted balance sheet is prepared for the next period showing all items of assets and liabilities except cash balance which is found out as the balancing figure of the two sides of balance sheet.if the assets side is heavier than liabilities side, the balancing figure is overdraft.

3.Adjusted Profits/Losses Method- This method is also called the cash flow statement. It provides income and expenses details for long term planning. To ensure the correct cash estimates the profit and loss account is adjusted. It is useful in budgetary control technique.

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