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Importance of Cash Budgets in the master budgeting process

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What is the main reason for preparing a cash budget in the master budgeting process?

What additional steps need to be taken for seasonal businesses to ensure an optimal outcome?

What are the risks associated with inaccuracies in preparing the pro forma income statement and cash budget?

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What is the main reason for preparing a cash budget in the master budgeting process?

The cash budget shows the cash inflow and outflow expected in the budget period. The major sources of cash inflow are: cash sales, collection of accounts receivable, dividend and interest income, disposal of fixed assets, long-term and short-term borrowing, and issue of equity capital. The major items of cash outflow are: cash purchases, payment of accounts payable, payment toward wages, salaries, rent, utilities, and other oper­ating expenses, tax payment, dividend payment, purchase of capital assets, and repayment of borrowings.

The preparation of the cash budget has its starting point in the operat­ing budget of the firm. The revenues and expenses shown in the operating budget have to be translated into cash inflows and outflows. In this context, the following points may be mentioned: (i) the pattern of collection of accounts receivable (which arise from credit sales) is estimated by applying a suitable "lag" scheme. For example, it may be assumed that 40 ...

Solution Summary

The importance of cash budgets in the master budgeting process is examined. The risks associated with inaccuracies are analyzed.