Study Objective 7 - Identify the Primary Elements of a Cash Budget
Cash is vital and planning the company's cash needs is a key business activity. The cash budget shows the anticipated cash flows, over a one- to two-year period. The cash budget contains the following three sections: * Cash receipts section—includes expected receipts from the company's principal source(s) of revenue, such as cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company's capital stock. * Cash disbursements section—shows expected payments for direct materials, direct labor, manufacturing overhead, and selling and administrative expenses. This section also includes pro jected payments for income taxes, dividends, investments, and plant assets. * Financingsection—shows expected borrowings and the repayment of the borrowed funds and interest

Why Prepare a Cash Budget?
A cash budget is important for a variety of reasons. For one, it allows you to make management decisions regarding your cash position (or cash reserve). Without the type of monitoring imposed by the budgeting process, you may be unaware of the cycle of cash through your business. At the end of a year or a business cycle, a series of monthly cash budgets will show you just how much cash is coming into your company and the way it is being used. Seasonal fluctuations will be made clear.
A cash budget also allows you to evaluate and plan for your capital needs. The cash budget will help you assess whether there are periods during your operations cycle when you might need short-term borrowing. It will also help you assess any long-term borrowing needs. Basically, a cash budget is a planning tool for management decisions.

Why should I have a cash budget?
A cash budget is incredibly important, for smaller businesses especially. A cash budget allows a business to establish the amount of credit that it can extend to customers without beginning to have problems with liquidity.

A cash budget helps you to avoid having a cash shortage during periods when you have numerous expenses.

If you cannot pay your expenses because you have a shortage of cash, you must immediately resolve this problem by ensuring that you bring in more revenue, deferring or eliminating some of your costs or being approved for a larger loan from your bank.

These solutions are time-consuming, costly, and not guaranteed, so it is therefore best to have planned for higher expenses ahead of time, if possible.