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Introduction
Cash budget basically is a budget plan for business
owners and business managers, which is made in
relation to set certain targets in regard to cost
of production, sales and profit to achieve their
goals with in a specific time period. However,
it is very important to know certain aspects before
preparing a cash budget. These may include the
previous budget and the estimated profit and loss
with the actual profit and loss, the contemporary
market situation as well as a calculated review
of the competitions in market. At the same time
a certain time period, the desired cash position,
an estimation of sales and expenses as well as
a blank worksheet is required while making a cash
budget. Therefore, a cash budget is a planning
tool that helps the management of a business company
in making important decisions.
Cash Budget Cycle and Purpose of preparing
a Cash Budget
Though there are many reasons to prepare a cash
budget prior to initiate any business, but the
most important purpose for preparing a cash budget
is to help the management taking good decision
in regard to the companies cash reserve for furthering
its business. When a cash budget is prepared,
at the end of the year, the company gets a strong
understanding over a series of monthly cash flow
with in and with out the company. Therefore, the
income fluctuation can be controlled in this way.
At the same time it also helps to evaluate a strong
plan for the companies capital needs as well as
expected emergency needs during any shortcomings.
However, this whole procedure is also known as
a cash budget cycle.
Negative Cash Flow Due to Rapid Expansion
in Sales
The net profit of a business company is directly
related to the cash budget. However, at times
it happens that the rapid increase in sales decreases
the cash flow of the company. The management of
a company should balance its sales objective with
the cost of production to avoid negative cash
flow in case of a sudden and rapid expansion in
sales. When a product is appreciated in the market
and its sale expands then the expected percentage,
the company with in a short time has to bring
the product back in the market with out a noticeable
gap to the customers. This is important for not
only the repute of the company but also for the
consistency of the product in the market. Therefore,
in such circumstances a company if has a backup
of cash flows, will not lose otherwise its profits
will transfer to losses. Another way to deal such
situation is to raise the prices of such products
whose sale has expanded so rapidly, which leads
to negative cash flow.
At the same time, the cash budget should not
extend a more liberal credit to its customers.
In cases of negative cash flow, the customers
will benefit more then the company thus the company
will be at financial loss or be at the edge of
insolvency.
Effect of Safety Stock on Inventory and function
of collateral in financial arrangements
The management of any business company should
be sharp in its calculations specifically in keeping
safety stock for emergency situations. For instance,
a successful company will at a very early stage
smell the rapid increase in sales of its products,
so in such circumstances, if the company has a
safety stock it can satisfy its customers and
at the same time maintain its inventory.
Therefore, in order to produce a long-term financial
strategy, it is very important for the management
to keep a collateral in stock for its financial
arrangements specifically to overcome emergent
targets.
Relation between the Cash Budget and Financial
Manager
Financial manager of any business company is
responsible to produce a successful cash budget
plan. The financial manager takes a historical
view of the previous cash budget cycles and also
keeps in mind the current demands of the market,
evaluating the possible profit and loss estimation
for its cash budget. Therefore, it summarizes
the financial needs of the company, understands
the very aspects of financial information related
to the business of the company and plans the cash
budget it. Therefore, the financial manager of
any company plays the key in structuring a profitable
business and maintaining its repute as well as
predicts the future of a business company.
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