Management of Finance: Cash Budgeting

Management of Finance: Cash Budgeting

Understanding Cash Budgeting

  • A cash budget is a detailed plan showing the anticipated inflows and outflows of cash in a business over a specified period.
  • It helps business to predict cash shortages and identify periods of surplus cash which can be utilised for investment.
  • It serves the dual purpose of planning and control, making management aware of when and where finances will be required.

Components of a Cash Budget

  • The opening balance is the amount of cash readily available to a business at the beginning of a period.
  • Receipts and payments include all expected inflows and outflows of cash such as sales revenue, wage payments, material costs, etc.
  • Closing balance is calculated by adding the opening balance and receipts, then subtracting payments.

Benefits of Cash Budgeting

  • Cash budgeting enables businesses to plan and control their cash resources effectively, minimising the risk of running out of cash.
  • It provides early warning of cash flow problems allowing time for corrective action to be taken.
  • It encourages managers to set clear financial targets and take responsibility for their achievement.

Limitations of Cash Budgeting

  • Cash budgets are dependent on the accuracy of forecasts; inaccurate assumptions can lead to cash flow problems.
  • They can be time consuming to prepare, particularly in larger businesses with complex operations.
  • An overemphasis on cash budgeting could lead to short-termism, where long-term objectives are sacrificed for the sake of meeting short-term cash targets.

Cash Budgeting and Decision Making

  • Cash budgets can guide management in making informed decisions about spending and investment.
  • They provide a quantitative base for the evaluation of performance and the formulation of future plans.
  • Cash budgets can influence the timing of expenditure; significant spending may be postponed if a cash shortage is forecasted.

Using Cash Budgets for Financial Control

  • Regular comparison of actual results with budgeted figures can indicate potential issues and areas of concern.
  • Discrepancies between actual and budgeted figures (known as variances) should be investigated and corrective action taken if necessary.
  • Ongoing monitoring and adaptation of the cash budget is crucial to maintain its relevance and utility as a management tool.