Cash budgeting is a tool that helps businesses track cash movements and estimate expenses. It can also help reduce expenses and control costs, and involve all managers in the budget process.
The cash budget is a tool that businesses can use to track all cash movements within their businesses. Both inputs and outputs are written in the budget; this information will usually come from the normal business operations of the company. The benefits of cash budgeting include finding out the expected amount of cash received from customers, calculating the amount of credit the company can extend to customers, estimating expenses, and providing a focus for management. This budget can also help businesses reduce expenses and begin to control costs.
High sales revenue does not always equate to high cash flows; This increases the importance of the cash budget. Businesses can often take their number of sales each month and calculate the amount of cash they expect to receive. This process is especially important for businesses that allow customers to purchase items on credit. Each company will often have a historical percentage that indicates how much cash it can expect to raise from sales. The remaining amount may be uncollectible, indicating that the company will lose this amount of money.
By calculating cash received from sales, companies can determine how much credit to extend to customers. For example, if a company has $100,000 United States Dollars (USD) in sales and expects to collect $95,000 USD, the company cannot extend credit above $95,000 USD without experiencing cash flow problems. If the normal time to collect accounts receivable is 30 days, the company should plan to have enough cash to last this amount of time without having to borrow money.
Expense estimation is another advantage of the cash budget. Businesses can enter the amount of normal expenses they experience each month to generate income. So, all ancillary cash outflows must be recorded in the budget. This allows the company to determine how much it spends on activities that do not add value to the company. A reduction in expenses or lowering of the cash budget limit limits can help the company increase its gross profit.
Not all managers care about cash in a business. In fact, very few managers can have a good understanding of accounting processes. Creating a cash budget allows owners and executive managers to involve everyone within the business and help them understand the importance of cash budgeting.
Involving all managers in the budget process can help give each one a sense of purpose. Managers can help the company reduce expenses and refine company operations. This will help ensure that the company does not become cash poor during its operational lifetime.
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