What is a cash budget, and how can this statement be used to help reduce the amount ofcash that a firm needs to carry? What are the advantages and disadvantages of daily overmonthly cash budgets, and how might a cash budget be used when a firm is negotiating aloan from its bank?

What is a cash budget, and how can this statement be used to help reduce the amount ofcash that a firm needs to carry? What are the advantages and disadvantages of daily overmonthly cash budgets, and how might a cash budget be used when a firm is negotiating aloan from its bank?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter8: Budgeting For Planning And Control

Section: Chapter Questions

Problem 11DQ

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Concept explainers

Cash budget

A cash budget is an estimate of an organization's cash flow for the future period. A cash budget forecasts future cash receipts and payments from various sources for a fiscal year. A cash budget can be created once a month or once a week to determine the organization's cash position and ensure its performance in relation to the budget. It aids in determining whether the company has enough cash and cash equivalents to meet its operational needs in the future. If cash receipts are insufficient to cover future expenses, an organization may plan to obtain funds from other sources. After estimating the sales, purchase, and capital expenditure budgets for the year, management develops a cash budget. These budgets are created to ensure that an organization's cash flow is managed. It is important to note that only cash transactions are recorded when actual cash enters and exits an organization.

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What is a cash budget, and how can this statement be used to help reduce the amount of
cash that a firm needs to carry? What are the advantages and disadvantages of daily over
monthly cash budgets, and how might a cash budget be used when a firm is negotiating a
loan from its bank?

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In an attempt to better understand RR’s cash position, Johnson developed a cash budget for the first 2 months of the year. She has the figures for the other months, but they are not shown. After looking at the cash budget, answer the following questions: What does the cash budget show regarding the target cash level? Should depreciation expense be explicitly included in the cash budget? Why or why not? What are some other potential cash inflows besides collections? How can interest earned or paid on short-term securities or loans be incorporated in the cash budget? In her preliminary cash budget, Johnson has assumed that all sales are collected and thus that RR has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting sense? (Hint: Bad debts will affect collections but not purchases.)
A cash budget is usually thought of as a means of planning for future financing needs. Why would a cash budget also be important for a firm that has excess cash on hand? Explain.
How would a shift from a tight credit policy to a relaxed policy belikely to affect a firm’s cash budget?
We discuss how to prepare the cash budget and understand therelationships among the operating budgets, cash budget, andbudgeted balance sheet. The cash budget helps managersdetermine whether they need to borrow money to fund operations,or whether they can make repayments toward their borrowings orinvest excess cash to earn interest. The cash budget and thebudgeted balance sheet are forward-looking versions of thestatement of cash flows and the balance sheet. Soup Inc. has the following budgeted sales: January $60,000, February$80,000, and March $90,000. 40% of the sales are for cash and 60% are oncredit. For the credit sales, 75% are collected in the month of sale, and 25% thenext month. The total budgeted cash receipts for March are:
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which one is correct please confirm? QUESTION 14 When preparing a cash budget, once a firm has estimated its cash receipts the firm must ____________. a. determine the desired cash balance b. pay dividends to its stockholders c. plan a pro forma statement d. schedule disbursements
Define breakeven point for a business and how it is calculated. Why is so much emphasis placed on budgets in today's corporate america? Do you think that budgets are a good financial projection, or do you think that most businesses create underestimated budgets in order to be able to meet financial goals? Discuss and give examples.
which one is correct please confirm? QUESTION 16 When preparing a cash budget, once a firm has estimated its cash receipts the firm must ____________. a. pay dividends to its stockholders b. determine the desired cash balance c. plan a pro forma statement d. schedule disbursements
Which of the following statements is true about a cash budget? Question 35 options: Cash budget provides a means of estimating how long it will take for a product to reach the break-even point and, therefore, how much money will be needed to launch a new product. Cash budget summarizes the cash flows into and out of a firm over a period of time. Cash budget focuses on the importance of maximizing a product’s per unit contribution. Cash budget helps an entrepreneur understand the concept of EBITDA break-even and how to calculate this point for each product a business’s produce.
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Jason Zhang has recently been hired as a financial analyst for Abbots Masonry Ltd. The CEO has come to Jason with some questions about cash budgeting and whether the company should start budgeting for cash on a monthly or annual basis. Required: Prepare the answers to the CEO’s questions as follows: a) What are the objectives of cash budgeting? b) Discuss the advantages and disadvantages of preparing a cash budget on a monthly basis versus on an annual basis.