What are the functions of a cash budget?

The main functions of the cash budget are the following: forecasting of cash requirement, cash position, controlling cash expenditure, expansion schemes and sound dividend policy.

What are the usefulness and merits of a cash budget?

It provides information about various sources of cash receipts and the use of cash. It provides information about future probable receipts and payments. Ensures payments are made on the due date

How often should a cash budget be updated?

It is generally recommended that companies update their cash budgets on a monthly basis. However, the frequency with which the budget is updated may vary depending on the needs of the business.

Cash Budget | Usefulness and Merits, Functions, Examples

Q: What is the difference between cash budget and working capital budgets?

Cash budget is designed to provide all business needs, including funds for the acquisition of fixed capital while workingcapital budget is to sets out estimated norms for the seasonal current capital requirements of the business.

Cash Budget: Definition

The cash budget is an estimate of cash receipts and their payment during a future period of time. It deals with other budgets such as materials, labor, overheads, and research and development.

The cash budget is an indicator of the probable cash inflows and outflows. When payments exceed income, proper cash management will be enforced.

When there is a surplus, expenditure is less than income, and a decision about how to use the surplus must be made.

Cash Budget: Explanation

The cash budget is a type of budget that estimates cash inflows and the use of cash during a specific period.

Here, the sources of cash include receipts from debtors, bill receipts, interest as loans, dividends on shares, and other incomes from the sale of fixed assets.

On the other hand, examples of cash utilization include payments to creditors, payment of assets purchased, and daily routine payments such as wages, rent, postage, telephone, and entertainment expenses.

The cash budget shows the budgeted cash receipts and cash disbursements for a future period of time.

The cash inflows and cash outflows are brought together in a cash budget to show the expected cash flows of the company.

Significantly, the summary of estimated cash flows presented in a cash budget enable companies to make plans about the future availability of cash.

Financial plans are drawn up to anticipate periods of high and low cash availability.

Large cash balances imply that the business has not earned the best rate of return. Low cash reserves mean that the business will be unable to meet its dues.

In general, companies should have an adequate cash balance to meet the forecasted cash requirements, plus additional reserves to meet unforeseen contingencies.

Usefulness and Merits of Cash Budget

The following are the merits of the cash budget:

1. Provides information about various sources of cash receipts and the use of cash

2. Provides information about future probable receipts and payments

3. Provides information about excess cash requirements and how these can be arranged

4. Useful in emergencies when cash balances are short, and also in showing how the gap can be covered

5. Ensures payments are made on the due date

6. Surplus balances can be invested to increase profitability

7. Enables planning for short-term repayments and long-term loans

8. Enables a safety cash level to be established to check uncertain cash outflows

Difference Between Cash Budget and Working Capital Budgets

The main differences between working capital budgets and cash budgets are summarized below.

Cash Budget	Working Capital Budget
Coverage: Designed to provide all business needs, including funds for the acquisition of fixed capital	Sets out estimated norms for the seasonal current capital requirements of the business
Period: Generally for a short period	For a comparatively long period
Nature: Capital expenditures are taken into account	Only non-capital expenditures are taken into account

Functions of Cash Budget

The main functions of the cash budget are the following:

Forecasting of cash requirement. The cash budget is useful in forecasting cash requirements for a particular period. This is useful in planning cash requirements at a most profitable time.

Cash position. This budget is an indicator of cash deficit or surplus at a specific time for which the firm's management can plan to borrow or invest surplus cash.

Controlling cash expenditure. Departmental budgets are difficult to change once they are prepared, and so every department tries to work with the allocated resources.