![]() Registration with the SEC does not imply a certain level of skill or training. The cash dividend is always preferred by the shareholders, where the higher rate is proof of the company's profitability.Ĭontent sponsored by Carbon Collective Investing, LCC, a registered investment adviser. It is always related to the liquidity position of the company. The cash budget is useful for a sound dividend policy. The cash budget serves as a technique for coordinating expansion programs. Expansion is the outcome of surplus resources. Departmental budgets are difficult to change once they are prepared, and so every department tries to work with the allocated resources. 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. This is useful in planning cash requirements at a most profitable time. The cash budget is useful in forecasting cash requirements for a particular period. The main functions of the cash budget are the following: Only non-capital expenditures are taken into account Nature: Capital expenditures are taken into account Sets out estimated norms for the seasonal current capital requirements of the business Cash BudgetĬoverage: Designed to provide all business needs, including funds for the acquisition of fixed capital The main differences between working capital budgets and cash budgets are summarized below. Enables a safety cash level to be established to check uncertain cash outflows Difference Between Cash Budget and Working Capital Budgets Enables planning for short-term repayments and long-term loansĨ. Surplus balances can be invested to increase profitabilityħ. Ensures payments are made on the due dateĦ. Useful in emergencies when cash balances are short, and also in showing how the gap can be coveredĥ. Provides information about excess cash requirements and how these can be arrangedĤ. Provides information about future probable receipts and paymentsģ. Provides information about various sources of cash receipts and the use of cashĢ. The following are the merits of the cash budget:ġ. In general, companies should have an adequate cash balance to meet the forecasted cash requirements, plus additional reserves to meet unforeseen contingencies. Low cash reserves mean that the business will be unable to meet its dues. Large cash balances imply that the business has not earned the best rate of return. Significantly, the summary of estimated cash flows presented in a cash budget enable companies to make plans about the future availability of cash.įinancial plans are drawn up to anticipate periods of high and low cash availability. The cash inflows and cash outflows are brought together in a cash budget to show the expected cash flows of the company. The cash budget shows the budgeted cash receipts and cash disbursements for a future period of time. 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. 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. The cash budget is a type of budget that estimates cash inflows and the use of cash during a specific period. When there is a surplus, expenditure is less than income, and a decision about how to use the surplus must be made. When payments exceed income, proper cash management will be enforced. The cash budget is an indicator of the probable cash inflows and outflows. It deals with other budgets such as materials, labor, overheads, and research and development. The cash budget is an estimate of cash receipts and their payment during a future period of time.
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