The Cash Management Budget or the Working Capital Budget is the most essential budget of an enterprise. It extracts information from all the other budgets. Due to this, after all the different budgets are completed, the Cash Budget is developed.
The cash budget accounts for cash inflows and outflows on a quarter-by-quarter, and month-by-month basis and also on a weekly or daily basis.
Importance of an Accurate Cash Budget
Developing an accurate cash budget is important to allow the enterprise to plan in advance for any unexpected excess cash that may accumulate or to enable them to prepare for any shortages in cash that may occur during the budget period.
Benefits of Predicting Cash Shortfalls
It is easier and less expensive for an enterprise to secure additional funds by predicting cash shortfalls if it is aware of its requirement before the shortfall is evident. An enterprise can proactively explain its cash inflow and outflow computations to others in the organization and external parties if it has prior knowledge of a cash shortfall.
In situations like these, an enterprise would have sufficient time to secure additional capital through debt or equity.
Enterprises Operating in Seasonal Businesses
Developing accurate cash budgets is essential for an enterprise. This is particularly for enterprises operating in businesses that are seasonal. In addition to this, for an enterprise operating in a seasonal environment, sales, ending inventory, and production are the most vital budgets.
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