Cash Budget is a useful tool for which planning
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It is a statement that shows the estimated inflows and outflows over the planning horizon of the company. Therefore, it represents the net cash position of the company for a budgeting period.
A cash budget is a useful tool for cash management, and it helps the company plan and controls the use of cash in a company.
So, it serves the following purposes:
- It determines when there will be excess cash available at a particular point in time. It identifies whether or not a firm/enterprise has sufficient cash to take advantage of cash discounts on accounts payable or pay dues promptly, formulate a dividend policy, or execute the planning for capital expansion.
- It identifies a period where there could be a shortage of cash, and hence measures should be taken to coordinate the same.
- It prevents the accumulation of excess funds.
- It helps the finance managers identifying the most favorable terms to allocate the cash and how they could make the most out of it.
So, to avoid unnecessary hardships to meet cash requirements, a firm needs to create a cash budget. It should do so to plan the best utilization of excess funds and arrange the shortage of funds. Since a budget highlights the requirements of the entire period, it could also help the firm compare the planned cash uses with the actual uses and cut on unnecessary items.
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The cash budget is one of the primary tools used in short-term financial planning for cash flow. It is often developed on a month-by-month basis. A good cash budget allows the owner to see short-term financial needs and develop opportunities for the business.