Cash Budgeting
Robert Buckman
7/28/10
Using a Cash Budget for Planning Purposes
Introduction
Let me begin by explaining what a cash budget is. A cash budget is a tool that helps individuals and companies forecast a short term financing needs. Investopedia defines a cash budget as, “an estimation of the cash inflows and outflows for a business or individual for a specific period of time.” (Cash Budget) A cash budget is used to determine the borrower’s ability to generate cash and repay debt. A cash budget also provides an estimate of a company’s or an individual’s short term cash position.
In this paper I will reveal the primary uses of cash budgets, as well as lay out a format for a cash budget, explain which borrowers should prepare a cash budget and explain the application of cash budgets.
Over View
A variety of companies, and every individual, would benefit from the use of cash budgets as a part of their own financial planning process. “Cash budgets are often used to determine if the business has enough money to fund its regular day to day routine or whether it has too much cash set aside which could be better utilized.” (Cash Budget) Banks review the cash budgets and examine the underlying assumptions, checking to see if they are realistic. For example when a person is starting a new company, the banks look at how the economic state is and see if the expected amount of sales is reasonable when compared to competitors. Banks also check if the projections are supported by the past performance of the company, when they are the look to see if the projections are dependable and conservative. They also want to see if the assumptions are within an individual’s control, such as the wage an individual would expect to earn or if management can make decisions which could affect profit. It almost goes without saying that we want to see past data is reliable. Banks don’t want to make a million dollar loan to an individual who only makes twenty thousand dollars a year or based on
7/28/10
Using a Cash Budget for Planning Purposes
Introduction
Let me begin by explaining what a cash budget is. A cash budget is a tool that helps individuals and companies forecast a short term financing needs. Investopedia defines a cash budget as, “an estimation of the cash inflows and outflows for a business or individual for a specific period of time.” (Cash Budget) A cash budget is used to determine the borrower’s ability to generate cash and repay debt. A cash budget also provides an estimate of a company’s or an individual’s short term cash position.
In this paper I will reveal the primary uses of cash budgets, as well as lay out a format for a cash budget, explain which borrowers should prepare a cash budget and explain the application of cash budgets.
Over View
A variety of companies, and every individual, would benefit from the use of cash budgets as a part of their own financial planning process. “Cash budgets are often used to determine if the business has enough money to fund its regular day to day routine or whether it has too much cash set aside which could be better utilized.” (Cash Budget) Banks review the cash budgets and examine the underlying assumptions, checking to see if they are realistic. For example when a person is starting a new company, the banks look at how the economic state is and see if the expected amount of sales is reasonable when compared to competitors. Banks also check if the projections are supported by the past performance of the company, when they are the look to see if the projections are dependable and conservative. They also want to see if the assumptions are within an individual’s control, such as the wage an individual would expect to earn or if management can make decisions which could affect profit. It almost goes without saying that we want to see past data is reliable. Banks don’t want to make a million dollar loan to an individual who only makes twenty thousand dollars a year or based on
Cited: Cash Budget. (n.d.). Retrieved July 26, 2010, from Investopedia: http://www.investopedia.com/terms/c/cashbudget.asp Pres, E. (1999). Analyzing Financial Statements. Lebahar-Friedman. White, G. (1997). The Analysis and Use of Financial Statements. Jon Wiley & Sons. Wild, L. B. (2000). Analysis of Financial Statements. McGraw-Hill.