Cash Budget

Introduction

Cash budget basically is a budget plan for business owners and business managers, which is made
in relation to set certain targets in regard to cost of production, sales and profit to achieve their
goals with in a specific time period. However, it is very important to know certain aspects before
preparing a cash budget. These may include the previous budget and the estimated profit and loss
with the actual profit and loss, the contemporary market situation as well as a calculated review of
the competitions in market. At the same time a certain time period, the desired cash position, an
estimation of sales and expenses as well as a blank worksheet is required while making a cash
budget. Therefore, a cash budget is a planning tool that helps the management of a business
company in making important decisions.

Cash Budget Cycle and Purpose of preparing a Cash Budget

Though there are many reasons to prepare a cash budget prior to initiate any business, but the
most important purpose for preparing a cash budget is to help the management taking good
decision in regard to the companies cash reserve for furthering its business. When a cash budget is
prepared, at the end of the year, the company gets a strong understanding over a series of monthly
cash flow with in and with out the company. Therefore, the income fluctuation can be controlled in
this way. At the same time it also helps to evaluate a strong plan for the companies capital needs as
well as expected emergency needs during any shortcomings. However, this whole procedure is also
known as a cash budget cycle.

Negative Cash Flow Due to Rapid Expansion in Sales

The net profit of a business company is directly related to the cash budget. However, at times it
happens that the rapid increase in sales decreases the cash flow of the company. The management
of a company should balance its sales objective with the cost of production to avoid negative cash
flow in case of a sudden and rapid expansion in sales. When a product is appreciated in the market
and its sale expands then the expected percentage, the company with in a short time has to bring
the product back in the market with out a noticeable gap to the customers. This is important for not
only the repute of the company but also for the consistency of the product in the market. Therefore,
in such circumstances a company if has a backup of cash flows, will not lose otherwise its profits will
transfer to losses. Another way to deal such situation is to raise the prices of such products whose
sale has expanded so rapidly, which leads to negative cash flow.

At the same time, the cash budget should not extend a more liberal credit to its customers. In cases
of negative cash flow, the customers will benefit more then the company thus the company will be
at financial loss or be at the edge of insolvency.

Effect of Safety Stock on Inventory and function of collateral in financial arrangements

The management of any business company should be sharp in its calculations specifically in keeping
safety stock for emergency situations. For instance, a successful company will at a very early stage
smell the rapid increase in sales of its products, so in such circumstances, if the company has a
safety stock it can satisfy its customers and at the same time maintain its inventory.

Therefore, in order to produce a long-term financial strategy, it is very important for the
management to keep a collateral in stock for its financial arrangements specifically to overcome
emergent targets.

Relation between the Cash Budget and Financial Manager

Financial manager of any business company is responsible to produce a successful cash budget
plan. The financial manager takes a historical view of the previous cash budget cycles and also
keeps in mind the current demands of the market, evaluating the possible profit and loss estimation
for its cash budget. Therefore, it summarizes the financial needs of the company, understands the
very aspects of financial information related to the business of the company and plans the cash
budget it. Therefore, the financial manager of any company plays the key in structuring a profitable
business and maintaining its repute as well as predicts the future of a business company.