A major responsibility of financial management of a firm is to maintain an adequate balance of cash. A growing business that is operating profitably may be starved for cash. It is, therefore, necessary to estimate beforehand the needs of cash in near future and to gauge the effects of any projected growth upon cash position of the firm. In many respects, the essence of finance function is found in the provision of funds in sufficient amount and in proper time to meet the needs of a corporation.
Availability of cash may be a matter of life or death. Sufficiency of cash can keep even an unsuccessful firm going in the face of prospective earnings. In fact, cash is the hub around which all financial matters center. Hence, the preparation of cash budget is very important.
Meaning and Definition of Cash Budget:
According to Guthmann and Dougall, “The cash budget is an estimate of cash receipt and disbursements for a future period of time.”
According to Walker – “A cash budget is a comparison of estimated cash inflows and outflows for a particular period, such as a day, week, month, quarter of year.”
According to James C. Vane Home – A cash budget is a forecast of future cash receipts and cash disbursements over various intervals of time.
Thus, it is a statement of expected cash-flows by time period for a specific duration. This period is normally one year or a quarter. It shows the comparative estimates of expected cash receipts and cash payments and the periodical cash position either in the form of cash surplus or deficiency. A cash budget is usually prepared for a short period like one year, one quarter or one month. Its periodicity will depend upon the nature of the business and status of cash position.
The most common budget period of cash is ‘one year’ as the cash with other functional budgets but if it is to be used as a control device then it should be prepared on a monthly basis. Generally the period of cash budget must synchronize with the periods for which other budgets are prepared.
Cash Budget V. Working Capital Budget
The cash budget is distinct from the working capital budget, since it is designed to provide for all the needs of the business including funds for the acquisition of fixed assets, payment of long term loans, interest thereon, dividends on capital and similar items. A working capital budget sets forth the estimated normal and seasonal current capital needs of the business and the plans to meet them as they arise. Various other operating budgets are used in connection with the preparation and execution of the working capital budget but are not a part of it.