Cash Planning and Cash Budget

## Cash Planning and Cash Budget

### Cash Planning

• A technique to plan and control the use of cash
• Main purpose: protect the financial condition of the firm by forecasting expected cash inflows and outflows over a specific period
• Presented as a projected cash statement
• Can be done daily, weekly, or monthly depending on business size
• As a company grows and operations become complex, cash planning becomes essential to avoid liquidity problems

First Step: Estimate cash required by preparing:

• Cash Flow Statement — shows actual inflows and outflows
• Cash Budget — shows future/forecasted inflows and outflows

### Cash Budget

Meaning: The most significant tool to plan and control cash receipts and payments over a specific period. Represents the cash requirements of the business during the budget period.

Purposes:

1. Coordinate the timing of cash needs — identify shortage or excess periods

2. Pinpoint excess cash periods so surplus can be invested to earn income

3. Enable firms to take discounts on timely payments to creditors

4. Help arrange adequate funds in advance — either meet shortages or invest surplus on favorable terms

Action Based on Cash Budget:

Main Components of Cash Budget:

1. Select the time period for budgeting (defines planning horizon)

2. Identify all factors affecting cash flows:

• Operating Flows — cash from regular business operations
• Financial Flows — cash from financial activities (loans, investments)