What is a Cash Budget?

The cash budget is a budget that reflects the expected cash flow of the company. The cash mentioned here includes monetary funds such as corporate cash and bank deposits. The purpose of preparing a cash budget is to reasonably handle cash income and expenditure business, dispatch funds, and ensure that corporate finances are in a good state. It includes the following: (1) Cash income. It includes the cash balance at the beginning of the period and the estimated cash income during the budget period, such as cash sales income, collection of receivables, discounted bills, etc. (2) Cash expenditure. Refers to the estimated cash expenditures during the budget period, such as payment for material purchases, wages, manufacturing costs, management costs and sales expenses, repayment of accounts payable, payment of sharp gold, purchase of equipment, etc. (3) excess or deficiency of cash. If the balance of cash receipts and payments exceeds the balance, it means that the cash is surplus and can be used to repay the loan and purchase short-term securities. If the funds are insufficient, it is necessary to borrow from banks, or issue short-term commercial paper to raise funds, as well as repay principal and interest. ^[1]

Cash budget

Sales budget

As long as the commodity economy exists, any enterprise must implement fixed-product sales. Therefore, the sales budget becomes the key to compiling a comprehensive budget, which is the starting point of the entire budget. Other budgets are based on the sales budget.

Production budget

The production budget is prepared on the basis of the sales budget, and its main contents are sales volume, beginning and ending inventory, and production volume. Due to many uncertainties, the time and quantity of production and sales of an enterprise cannot be completely consistent.

Direct material budget

The direct material budget is prepared on the basis of the production budget, and at the same time, the inventory level of raw materials must be considered. The main contents of the direct material budget include the unit product consumption of direct materials, the production demand, the beginning and end stocks, etc.

1.Determine cash income

2. Planned cash expenditure

3. Prepare a cash budget statement

example

The cash balance that the enterprise needs to keep is 6,000 yuan. If it is insufficient, it needs to borrow from the bank. Assume that the amount of bank borrowing is required to be a multiple of 1,000 yuan. Then the loan amount for the second quarter is:

Cash surplus in the third quarter can be used to repay borrowings. Generally, the interest is estimated on the basis of "borrowed at the beginning of each period and returned at the end of each period", so the loan period in this example is 6 months. Assuming the interest rate is 10, then

The significance of cash budget and its position in corporate financial management:

1.Improve the ability of enterprises to avoid financial risks

Enterprises often need to have enough cash to pay their employees' salaries, pay their accounts payable and bills, and other due debts, and fail to pay their debts in a timely manner, which is called "insolvency." Insolvent companies may be forced to declare bankruptcy. Even well-managed companies sometimes feel short of positions during periods of tight market capital, their own infrastructure, expansion of sales activities, or production scale. Therefore, the business operator must carefully plan the cash flow so that the cash on hand is always available.

Keynes's theory of money demand states that there are three main motivations for companies to hold cash: First, transaction motivation. This is a daily business need for business and capital purposes. Second, prevent motivation. This is cash preparation for unexpected events. Third, invest in motorsports. What it really means is that companies should hold enough cash to seize profit opportunities that may arise at any time. As a production and operation unit, an enterprise should determine the most reasonable amount of cash holdings, that is, the cost of cash stock is the lowest, and it can ensure the level of holdings of cash requirements. If the cash holdings are too large, it will reduce the corporate income level; if the cash holdings are too small, it may affect the normal conduct of transactions and unexpected cash needs, creating the risk of interrupting transactions. This requires financial staff to make some efforts to determine the most reasonable cash holdings of the enterprise. The most reasonable amount of cash holdings can minimize the overall cost of the company's cash opportunity cost, management cost and shortage cost. Among them, opportunity cost refers to the enterprise to abandon some investment opportunities in order to maintain a certain amount of cash; management cost refers to the price that the company needs to pay for the management of the deposited cash assets; shortage cost refers to the lack of necessary The company's cash assets cannot meet the necessary business expenses, and the company suffers various losses. Based on the relationship between three types of costs and cash holdings, an enterprise can use the "Cash Holding Cost Analysis Chart" method to find the lowest point of the three comprehensive costs. The cash holdings of an enterprise at this lowest point of cost are the most reasonable cash holdings of the enterprise. By arranging cash holdings, the cash budget can enable the company to maintain a high level of profitability, while maintaining a certain level of liquidity, and determine the type of debt structure and term structure according to the level of the company's use of funds. Time is not too passive.

Under the conditions of a market economy, enterprises face various risks, and the ones that have the greatest impact on enterprises are financial risks. The main manifestation of financial risk is payment risk. This risk is caused by the contradiction between the uncertainty of the company's future cash flow and the debt maturity date. Many companies have failed to properly handle the relationship between the two, affecting their normal production and operation activities and even going bankrupt.

The cash budget can predict the company's direct solvency of due debts in the future, and can directly reveal the period of the company's cash shortage, so that the financial management department can arrange fundraising before the period of the shortage is revealed, thus avoiding the debt maturity, Because the inability to repay affects the credibility of the company and increases resistance for future financing of the company; or the company is forced to "demolition the eastern wall to fill the western wall" and borrow new debt at high interest rates. These have increased the financial risks of enterprises to a certain extent.

2. Promote the cooperation and exchange between various departments within the enterprise, and reduce conflicts and contradictions between them.

The cash budget is based on various operating budgets such as sales budget, production budget, direct material budget, and so on. The data provided by them is required, and the sales budget is the basis of each budget. This requires enterprises to strengthen communication and exchanges between internal departments, propose improvements to each other, clarify the responsibilities of each department, facilitate coordination between them, and avoid the occurrence of mutual referral events due to unclear responsibilities. The enthusiasm of various departments of the enterprise lays the foundation for the company to make a good cash budget.

3. Provide enterprise performance evaluation standards to facilitate assessment and strengthen internal control

The modern market is an extremely complex large system. A single enterprise is only a molecule in this large system. To survive and develop in a complex and fiercely competitive environment, enterprises must strengthen and rely on effective management. Financial management is an important aspect of business management, and it is at the core of overall management. Cash budgeting is the top priority of financial management. Harold Williams, a former chairman of the Securities Commission, once said, "If you let me make a comparison between profit information and cash flow information, then I choose cash flow." Especially in the management of large-scale enterprises, where the development of enterprises is becoming more mature, the size of their organizations is increasing, and their structures are becoming more and more complex, because cash flows are closely related to the survival, development, and growth of enterprises, they are paying more and more attention to cash flow information. Practice has proved that the management and control of cash flow by enterprises has become the key to financial management.