Question

what is the benefits of the preparation of cash budget for the management ?

Answer 1

cash budget is a tool to gauge your ability to meet expectations and live up to predictions. But it is virtually inevitable that your day-to-day financial activities will not precisely conform to your cash budget simply because it is impossible to predict the future. The process of comparing your actual income and expenses with the numbers that you project in your cash budget provide you with a fertile opportunity to evaluate your expectations and take a close look at your assumptions.

Benefits of Cash Budget For Management

Creating a budget helps you to anticipate cash-flow shortfalls and plan for major expenditures. If you can foresee when your business is likely to be short of cash, you can seek financing in advance, and if you can identify the time of year when you'll likely be flush, you can plan capital improvements to coincide.

The process of budget forecasting is also an opportunity to set aside time to focus on understanding how your business works financially. If your payroll figures add up to a consistent percentage of your revenue over time, you can use that percentage with confidence for making forecasts. If your payroll percentage swings wildly from one end of the spectrum to the other, the budget forecasting process is an opportunity to research and identify the variables behind these divergences and then make changes to achieve greater consistency.

The budget evaluation process forces you to take a close look at your assumptions and to consider whether you've simply encountered unforeseen circumstances that led to unforeseen outcomes or whether your understanding of the financial variables in your business was incomplete. If you made flawed assumptions, the evaluation process creates a space and process for revising your thinking.