Question

Why is a cash budget important even when there is plenty of cash in the bank? Explain.

Answer 1

A cash budget is a very important part of a finance manager's job, even when there is plenty of cash in the bank.

A cash budget is a forward-looking estimate of the cash account of a company. It estimates the cash inflows and cash outflows for the relevant period. In fact, it is nothing but a projected cash account / cash flow statement for the business.

Preparing a cash budget breaks down the cash inflows/outflows categorically into relevant heads. It is a systematic way of budgeting for the cash inflows/outflows before hand.

Preparing a cash budget helps the finance manager in better performing the job. At the end of the relevant period, the budget can be compared with the actual cash account / cash flow statement to find out where the differences arose. Thus, remedial action can be taken for the next period so that the cash is spent in a disciplined manner.

The amount of cash in the bank is therefore not important. It is the discipline involved in maintaining a cash budget that is important to the role of the finance manager.