Question

PURPOSE

The purpose of this assignment is to enable students in understanding an organisation’s financial goals through the preparation of functional and cash budgets that together integrate into a business plan.

Explain how cash budgets help in:

(i) forecasting future needs;

(ii) controlling cash expenditure;

(iii) evaluation of performance; and

(iv) acting as a sound dividend policy.

Answer 1

i). Cash budget shows various sources of cash receipts and payments and if the net result is negative i.e. if Cash budget reveals a negative figure then it means that firm will require further Cash which may be in the form of borrowing. This, it helps in forecasting future needs. Also it shows how much cash is required in future for which purpose and thus, we can say it cash budget helps us in forecasting future needs of cash for various purposes.

ii) . Cash budget shows us varus various expenditures where Cash will be spended and thus we can find out where the cash has been going and accordingly we can take steps to control Cash expenditures . Thus, we can say that Cash budgets help in controlling Cash expenditure.

III) . Cash budget contains Cash receipts from revenue as well as other sources and the relative spending of cash to earn those revenue . Accordingly, with the help of cash budget we can find out how organization has been performing . Thus , cash budget helps an organization to evaluate it's performance

iv). In order to declare dividend company first should find out how much cash will be available with it. Since dividend is paid in cash , thus, a company must be aware about how much cash will be available with it then only it can decide how much cash it can distribute as dividend. And it is possible only if company has prepared it's Cash budget since Cash budget will help a company to determine the future availability of cash with it. Thus, cash budget helps in a sound dividend policy.