The most important budget of an enterprise is known as the Cash Management Budget or the Working Capital Budget, and it’s an important topic to study for the Certified Management Accounting exam.
This budget extracts information from all the other budgets. For this reason, the Cash Budget is developed after all the other budgets are completed.
The cash budget meticulously accounts for cash inflows and outflows on a quarter-by-quarter, and month-by-month basis. This budget can also track cash inflows and outflows on a weekly or daily basis.
Importance of an Accurate Cash Budget
The importance of developing an accurate cash budget is extremely high. An accurate Cash Budget allows an enterprise to plan for any cash shortages that may occur during the budget period.
An accurate Cash Budget also allows the enterprise to plan in advance for any unexpected excess cash that may accumulate. Excess cash should be utilized during the time period when it is needed.
Benefits of Predicting Cash Shortfalls
Predicting cash shortfalls makes it easier and less expensive for an enterprise to secure additional funds if it is aware of its requirement before the shortfall is evident.
Prior knowledge of a cash shortfall also enables an enterprise to proactively explain its cash inflow and outflow computations to others in the organization and external parties.
In such situations, an enterprise would have ample time to secure additional capital through debt or equity.
Enterprises Operating in Seasonal Businesses
Developing accurate cash budgets is essential for all enterprises. This is particularly so for enterprises operating in businesses which are seasonal.
Additionally, for an enterprise operating in a seasonal environment, sales, ending inventory, and production are the most vital budgets.
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