## Role of Cash Budget in Cash Management

### What is a Cash Budget?

A Cash Budget is the most significant device to plan for and control cash receipts and payments. It represents the cash requirements of the business during the budget period.

### Why It is Central to Cash Management

The cash budget plays four key roles:

1. Coordinates timing of cash needs

Identifies periods of potential cash shortage OR abnormally large cash requirements.
Allows the firm to arrange financing in advance, not in panic.

2. Pinpoints surplus periods

Helps identify when there is likely to be excess cash.
Surplus can then be invested in marketable securities.

3. Enables firm to take advantage

A cash-rich firm can take cash discounts on accounts payable.
Improves supplier relationships and reduces cost of purchases.

4. Plans funds on favourable terms

Adequate planning avoids both excess and shortage of cash.
Allows borrowing at lower rates with advance notice.

### Big Picture

Without a cash budget, the firm is reactive — borrowing in emergencies and missing investment opportunities. With a cash budget, it is proactive — financing decisions are timed and priced well.

Worked example

### Example 1

Example: A cash budget shows ₹20 lakh surplus in July and ₹15 lakh shortage in October.

In July, treasurer invests ₹20 lakh in 90-day T-bills earning 7%.
In October, T-bills mature giving ₹20.35 lakh — comfortably covering the shortage with ₹5 lakh to spare. No emergency borrowing needed.

⚠️ Common exam mistakes

Confusing cash budget with profit budget — cash budget tracks RECEIPTS and PAYMENTS, not income/expenses.
Missing the dual role: managing both shortage AND surplus.
Forgetting cash discount benefit as an advantage.

Reference:

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