ESTIMATING THE CASH REQUIREMENTS:
The company hold adequate cash balance but should necessarily avoid the excessive balances. For this purpose, basically the company is required to assess its need for cash properly. for this purpose, one of the best tools available with the company is to prepare the cash budget.
A cash budget is the statement showing the various estimated sources of cash receipts on one hand and the various applications of cash on another hand. Thus, by preparing the cash budget, the company may predict whether at any point of time there is likely to be excess or shortage of cash. If the shortage of cash is estimated, the company has to arrange the cash from some other sources. If the excess of cash is estimated, the company may explore the possibility of using the cash balance profitably.
Before preparing the cash budget, following principles must be kept in mind.
(1) The period for which the cash budget should be prepared, should be selected very carefully. there is no fixed rule as to the period to be covered by the cash budget. It depends upon company and individual circumstances. As a general rule, the period to be covered by cash budget should neither be too long not too short. if it is too long it is possible that the estimates will be inaccurate. If it is too short the areas which are beyond he control of the company will not be given due consideration.
(2) The items which should appear in the cash budget should be carefully decided. naturally, all those items which do not have bearing on the cash flows will not be considered while preparing the cash budget for e.g.
As the cost in the form of depreciation does not involve any cash outflow, it does not affect the cash budget, though the amount of depreciation affects the determination of the tax liability which involves cash outflow.
While preparing the cash budget, the various items appearing in the same may be classified under the following two categories
i. Operating cash flows:
There are the items of cash flow which arise as the result of regular operations of the business.
ii. Non Operating flows:
There are the items of cash flow which arise as the result of other operations of business.
The company hold adequate cash balance but should necessarily avoid the excessive balances. For this purpose, basically the company is required to assess its need for cash properly. for this purpose, one of the best tools available with the company is to prepare the cash budget.
A cash budget is the statement showing the various estimated sources of cash receipts on one hand and the various applications of cash on another hand. Thus, by preparing the cash budget, the company may predict whether at any point of time there is likely to be excess or shortage of cash. If the shortage of cash is estimated, the company has to arrange the cash from some other sources. If the excess of cash is estimated, the company may explore the possibility of using the cash balance profitably.
Before preparing the cash budget, following principles must be kept in mind.
(1) The period for which the cash budget should be prepared, should be selected very carefully. there is no fixed rule as to the period to be covered by the cash budget. It depends upon company and individual circumstances. As a general rule, the period to be covered by cash budget should neither be too long not too short. if it is too long it is possible that the estimates will be inaccurate. If it is too short the areas which are beyond he control of the company will not be given due consideration.
(2) The items which should appear in the cash budget should be carefully decided. naturally, all those items which do not have bearing on the cash flows will not be considered while preparing the cash budget for e.g.
As the cost in the form of depreciation does not involve any cash outflow, it does not affect the cash budget, though the amount of depreciation affects the determination of the tax liability which involves cash outflow.
While preparing the cash budget, the various items appearing in the same may be classified under the following two categories
i. Operating cash flows:
There are the items of cash flow which arise as the result of regular operations of the business.
ii. Non Operating flows:
There are the items of cash flow which arise as the result of other operations of business.