The cash budget is a plan of future cash receipt and payment. The statement showing the estimated cash income (cash flow) and cash expenditure (cash outflow) over a projected time period is known as cash budget. A very helpful tool in cash management is the cash budget. It helps management in planning to avoid unnecessary idle cash balance. In the same way, it also helps to eliminate unneeded expensive borrowing. Thus, the cash budget helps a management keep cash balances in reasonable relationship to its needs.
A cash budget serves the following purposes:
(1) It indicates the effect on the cash position of seasonal requirement large inventories unusual receipts and slowness in collecting bills receivable.
(2) It indicates such cash requirement for a plant or equipment expansion programme.
(3) It points to the need for additional funds from external sources such as bank loans issue of securities.
(4) It indicates the availability of cash for taking advantages of discount offered.
(5) It helps in planning redemption of preference shares or redeemable debentures payment of pension etc.
(6) It shows the availability of excess funds for short or long term investments.
A cash budget includes no accrual items. For example income earned or accrued but not received and expenses incurred or outstanding but not paid are not included in cash budget. Only the cash transactions are included in cash budget. The cash transactions for preparing this budget is obtained from various operating budget discussed above. for example, cash sale and collection from customers can be ascertained from sales budget. Monthly cash purchase and cash payment to form labour budget overhead cost from overhead budgets can be ascertained. This method of preparing cash budget is known as receipt and payment method and is a common method of preparation.
The cash budget consists of following four major section sections:
Step 1 Receipt section.
Step 2 Disbursement section.
Step 3 Cash surplus or deficit section.
Step 4 Financing section
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