Why cash budget is important an organization?


If you are working in the Finance Department of an organization, I bet you would know how important the cash budget is.  Every organization knows the significant of a cash budget and how it can determine the future direction of its business.

In fact cash budget is one of the key components of a master budget. From my experience, it is the most difficult budget to prepare compare to the rest. The rest of the components are sales budget, purchase or cost of sales budget, operating budget and capital budget.

Cash budget is in reality a plan or forecast of cash inflow and cash outflow events which are anticipated to take place in the near future. It can be a net cash surplus or net cash shortfall position.

If the organization has surplus cash in the budget, action plans will be laid down on how to utilize the cash effectively.  Examples would be the surplus cash can be dividend out to the shareowners or can be reinvested to expand the business. 

If there is no clear direction yet, the most prudent and straight forward way to manage the surplus cash is to place it in the money market to earn interest. There are a variety of rates in the money market. You can put cash on a daily, weekly, monthly or yearly plan. The long the plan the higher is the interest rate.

In the event that the budget shows that the organization will have a shortfall cash position in the near future, plans must be devised on how to get additional cash to finance the shortfall position. It is very crucial to see that the organization has cash to finance the shortfall position in order to carry on its operations smoothly.

Some of the common ways to bring in cash would be new cash capital injection, getting loans from banks and getting temporary loans from directors or other parties. In the case of loans, the organization will be expected to pay the loaner some interests which will result in extra expenses.

Not all shortfall cash budget signifies that the organization makes losses.  Shortfall cash budget could happen in situation whereby cash is required to finance the cost of a profitable business venture upfront before revenue can be collected at the later stage.

Learn how to prepare budget and forecast at <http://budgetingandforecastingsoftware.org/business-income-budget.php>

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Source by Shao Jye