What is Cash Budget?
Cash Budget is estimation or projections of the cash inflow and outflow for an organization, entrepreneurs’ for a specific period of time.
It is a plan. It shows monthly and yearly cash inflow and outflow in an organization.
Why Cash Budget
It is used to assess the cash position within an organization, whether the organization has sufficient cash or not. It is the most important analysis for small businesses because it helps to companies to analyze as how much credit it can give to their customers before their liquidity problem.
It is an important analysis for every individual. It helps to determine whether their cash is spending on proper way. This analyzes increase the awareness about the value of certain expenditure. By cutting unnecessary cost and expenditure will increase the opportunities of the additional saving.
In companies, it helps to make effective management decision regarding liquidity level, cash position, investment ratio, cash reserve ratio.
It provides the awareness of cycle of cash. Every business has different cash cycle as per their business nature. At the end of specific time period, it shows that how much cash is coming and how much cash is utilizing.
How to create Cash Budget
There are three main components to prepare;
- Specific time period
- Desired Cash position
- Projection of Cash inflow and Outflow items (Sales and Expenditure)
First of all, decide the time period for which you are making cash budget. For example, is cash budget preparing for?
- Next 3 month
- Next 6 months
- Next twelve months and so on.
The desired cash amount is depending on the nature of business. High predictability of account receivable and the probability of loss in market increase the high amount of desires cash.
Projection of Cash Inflow and Outflow
The basic concept of cash budget is the projection of future cash flow analysis. For future cash flow analysis, it is impotent to estimate the cash inflow and cash outflow of business. The most important projection item is the “sales” values monthly or yearly basis. Once this is decided by management, the rest of cash budget can fall into places.