Cash Budgeting

What are the three sections of a Cash Budget, and what is included in each section?

There are three sections to each Cash Budget: The Cash receipts, Cash disbursements, and Financing.

The Cash receipts portion contains all receipts on incoming cash for the company. This can include cash/credit sales, interest, dividends, investments, and any receipts of positive assets.

The Cash disbursement portion reflects all the companies outgoing payments and expenses for the time period. This can include operating, faciliites, labor, taxes, inventory, and anything that will deduct from the positive incoming cash flow as negative outgoing expenses.

The Financing area shows all the businesses expected credit borrowing and any repayments of previously borrowed funds including any expenses added for interest.

Why is a Cash Budget so vital to a company?

Simply, the importance of a Cash Budget to a company is similar to what a check book balancing method is to an individual person. A company needs a Cash Budget because it is critical for a business to know where it stands each month/time period in reflection to incoming funds and outgoing expenses so that it can better forecast and plan any future needs for cash shortfalls while also taking possible excess non-strategic funds/cash and putting them into investments to create even more positive cash flow for the future of the company. It is a smart way for a company to continuously look at all cash needs under specific time periods in the future to estimate the best possible use or strategy for its cash reserves or cash short falls.

What are the five basic principles of cash management that a company can follow in order to improve its chances of having adequate cash?

1) Make Receivables Collection as quickly as possible.

The shorter the amount of time sales credits are outstanding to the business, the shorter the amount of time the company has to wait to use that cash for repayments or the longer the amount of time to plan and invest it.

2) Maintain Inventory thresholds as Low as possible.

Inventory equals assets or idle cash if it is not turning into sales or receipts at a reasonable rate. It's a delecate and challenging task to keep inventory levels at their minimum to meet sales demands but not exceed expected sales demands for the best possible balance. (I should know since I've managed inventory almost twenty years - lol)

3) Maintain Liability payments to the Companies Best Advantage.

Accounts payable should do their best to hold money for payments to the last day possible while avoiding late fee's but allowing the company to use that cash before payment to it's fullest advantage