Why Is Cash Budgeting Important to the Organization?
The difference between a company that succeeds and one that fails is often cash management. Having too little cash means a business may have to pass on profitable ventures or take out loans to overcome liquidity issues. Too little cash may also mean a company may be unable to operate at normal levels or be forced to shut down completely. To avoid these issues, companies rely on a cash budget to plan and control cash receipts and payments.
The cash budget is management’s approximation of cash on hand at the beginning of a budget period and the estimated cash inflows and outflows. The cash inflows may include those that result from cash sales, the sale of assets, the collection of accounts receivable, borrowing cash or stock issuance. The cash outflows may include disbursements for material purchases, debt repayment, asset acquisition, taxes, manufacturing costs and dividends. The cash budget highlights a company’s probable income
or deficit for a period, the latter of which the company must address by increasing sales or decreasing expenditures. The importance of the cash budget lies in its ability to identify a company’s future financing needs, highlight the need for corrective actions and evaluate a company’s performance.
By creating a cash budget, a company can anticipate when a cash deficit might exist and the extent of that shortfall. In turn, the budget indicates when a difference between budgeted and actual values might need to be made up by borrowing. Short-term financing might be required to acquire inventory, promote products or pay monthly expenses. By predicting cash requirements, a company can also evaluate future business opportunities in part based on an opportunity’s probable financing needs and costs. For instance, financing costs will influence the profitability of a merger and product development. This process allows a company to select only those organizational goals that are financially feasible.Source: yourbusiness.azcentral.com