Importance of Cash Budgeting

Importance of cash budgeting

According to Horngren, Bhimani, Datar and Foster (2007, p.467), a budget is a quantitative expression of a proposed plan of action by management for a future time period and is an aid to the coordination and implementation of the plan. It can cover both financial and non-financial aspects of these plans and acts as a blueprint for the company to follow in the forthcoming period. Cash budget fits into financial part and it estimates cash inflow and outflow of a company for a specific period of time, usually it takes one year. More specifically, cash budget helps managers to determine whether cash is enough to support the business and whether cash is used effectively. Overall, cash budgeting is very useful for management decisions and is extremely important for a small and rapidly expanding company. The reasons are stated as follows. First of all, cash budgeting contributes to effective management in planning. In the view of Weetman (2006, p.318), a planning process encourages every department of the company work together to achieve the overall plan and to identify potential problems in early times. Take Doomy Corporation for example, we can see that by preparing cash budget? Doomy has cash deficiency in April and May, which helps it to raise funds in advance avoiding cash shortage. Or when there is cash surplus, such as in June, then plans of investment are worth considerable to use money more effective, such as putting the money into banks to earn interests or invest into production and advertisement to improve productivity and promote sales etcetera. However, if Doomy Corporation make wrong estimation about the economic condition, then it may suffering low level of sale, as a result, market research is needed. In the second place, cash budgeting provide a standard for control. It is beneficial to control the expenses in order to keep it under budget limitation to maximise profit. What is more, when budget plans put into practice, then the differences between actual performance