AccountingBudgeting

Functions of Cash Budget in an Organization

The cash budget is an estimate of cash receipt and disbursements for a future period of time. A cash budget is a forecast of future cash receipts and cash disbursements over various intervals of time. 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.

Functions of Cash Budget in an Organization

Cash budget is used as means of coordinating the activities of the various operating departments of a concern. It is a device for coordinating and controlling the financial side of the business to ensure solvency. Its main functions are as follows :

(1) Forecasting the future needs of funds : It is possible to determine in advance, how much funds will be needed and when ? The raising of funds through most profitable source at reasonable terms can be planned.

(2) Controlling Cash Expenditure : It acts as a control device too. The expenses of various departments can be cost controlled so as not to exceed the means of business.

(3) Maintenance of Cash Planning : It helps in maintenance of Cash Planning : It helps in maintaining an adequate cash balance for expected requirements and provides a reasonable margin for the unexpected.

(4) Helpful in Cash Planning : Cash budget helps in cash planning also. It shows the cash surplus as well as deficiency of cash at selected points of time. If suggests the suitable sources of financing, necessary to fill deficiency and investment of short-term surpluses.

(5) Testing the influence of proposed expansion programmes : Cash budget helps in advance to test the influence of proposed programme on cash position. It serves as a device for coordinating the financial aspect of the growth.

(6) Maintenance of Liquidity : It enables a firm to maintain sound liquidity. By planning ahead, the credit position of the enterprise may be strengthened.

(7) Evaluation of Performance : It acts as a standard for evaluating the performance of operation.

(8) Maintenance of a sound dividend policy : It assists in maintaining a sound dividend policy consistent with the liquidity position of the firm. Cash dividend is always preferred by share- holders. They maintain prestige, ensure good relations with share-holders and facilitate any stock financing.

(9) Basis of Long-term planning : Cash budget is an important basis of long-term financial planning. It is mainly useful for the study of long-term financing with respect to probable amounts, timing, forms of security and methods of repayment. Thus, it is an important tool for financial planning and Control.

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