A budget is a monetary plan for an upcoming period. It can also help forecast financial performance and position. Usually, companies prepare a budget for every financial period. Once created, companies can use it as a tool to control performance. Companies can use various types of budgets for different areas within operations. One of these includes the cash budget.
What is a Cash Budget?
A cash budget is a plan for cash inflows and outflows over a specific period. It applies to companies and individuals, although it may be more helpful to the former. In accounting, companies use the accrual concept, which does not consider the cash settlement date for transactions. Some budgets may also use the same principle to conform to financial practices.
However, the cash budget only plans for cash transactions. It estimates the inflows and outflows of monetary resources over a period. Consequently, it helps forecast whether a company will have enough cash to continue its business over that period. On top of that, a cash budget is also helpful in managing working capital, which is critical to continuous operations.
How to prepare a Cash Budget?
Companies use several steps when preparing a cash budget. However, the format may differ from one company to another. Companies can modify this budget based on their requirements and needs. However, it uses the same base by estimating cash inflows and outflows. It also nets off those flows to reach a cash surplus or deficit.
Companies can use one of three methods to prepare a cash budget. These include the following.
Receipts and payments method
The receipts and payments method is the most prevalent method for preparing the cash budget. In this method, companies estimate their cash receipts from various sources and all payments for a specific period. Subsequently, this method subtracts the difference between receipts and payments from the opening cash balance to reach the closing balance.
Balance sheet method
The balance sheet method also helps companies create a cash budget. This method requires companies to prepare a balance sheet based on forecasts. Consequently, companies estimate their assets excluding cash and cash equivalent balances, liabilities, and equity. The balancing figure between these amounts will be the closing figure for cash and cash equivalents.
Adjusted profit and loss method
Companies can also use the profit and loss account to prepare a cash budget. This method entails listing all expenses and income in the income statement. However, these may follow the accrual principle. Companies can then prepare a budgeted cash flow statement using the indirect method. This method can help create long-term cash budgets.
What is the importance of the Cash Budget?
Cash budgets play a crucial role in helping companies plan their cash activities. It helps predict a company's future cash position. Consequently, it shows whether the company can expect a cash surplus or deficit. In the former case, the company can invest that surplus in other activities. If the budget calculates a deficit, the company can explore financing options.
The cash budget can also help with other aspects of the business. This budget plays a crucial role in working capital management as well. Consequently, it can dictate other policies, such as credit limit, credit term, production cycles, etc. Cash budgets play the same role in companies as other budgets, helping with internal control.
Conclusion
Cash is a crucial part of operations for any company. Therefore, managing it efficiently and effectively is highly critical. One tool that can help in this regard is a cash budget. This budget estimates future cash inflows and outflows. Consequently, it can predict whether a company can expect a cash surplus or deficit in the future. Companies can prepare a cash budget in various ways, as listed above.
Post Source Here: Cash Budget: Definition, Accounting, Purpose, Examples, Preparation
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