A cash budget is a budget that focuses on cash receipts and payments that are expected to occur in the future. Cash management is one of the main important factors in a business. A company that experiences cash shortages could be forced into bankruptcy in the future. Businesses that have excess cash can lose the opportunity to earn investment income or can reduce interest costs by repaying debt. A cash budget can tell management anticipated cash shortages or excess cash balances. A cash budget can help management plan financing activities, make arrangements to cover shortages by borrowing and planning to repay past borrowings and make the right investments when the excess of cash is expected. (Edmonds, 2012).
Budgets are usually prepared using spreadsheets or computerized mathematical models that allow managers an analysis of what could happen in the future. A cash budget is divided into three main sections. (1) A cash receipt section which is the cash available and it is figured out by adding the beginning cash balance to cash receipts from its customers. (2) a cash payment (or disbursement) section which includes expected cash outflows for inventory purchases, S&A expenses (selling and administrative expense), investments, and interest expense and (3) a financing section which is cash shortages or repayments. The information needed to prepare a cash budget can be found in cash receipts and payment schedules. (Edmonds, 2012).
The cash receipts section consists of a listing of all the cash inflows, expect for financing expected during the budgeting period. The main source of receipts will be from sales. The cash payment (or disbursement) section consists of all cash payments that are planned for the budgeted period. The payments will include raw materials purchases, direct labor payments, manufacturing overhead costs, and so on as labeled in their respective budgets. Also, other cash disbursements such as equipment...