The importance of
cash budget may be summarised as follow:-
Helpful in Planning. Cash budget helps planning for the most
efficient use of cash. It points out cash surplus, or deficiency at
selected point of time and enables the management to arrange for the
deficiency before time or to plan for investing the surplus money as
profitable as possible without any threat to the liquidity.
Forecasting the Future needs. Cash budget forecasts the future
needs of funds, its time and the amount well in advance. It, thus,
helps planning for raising the funds through the most profitable
sources at reasonable terms and costs.
Maintenance of Ample cash Balance. Cash is the basis of
liquidity of the enterprise. Cash budget helps in maintaining the
liquidity. It suggests adequate cash balance for expected
requirements and a fair margin for the contingencies.
Controlling Cash Expenditure. Cash budget acts as a controlling
device. The expenses of various departments in the firm can best be
controlled so as not to exceed the budgeted limit.
Evaluation of Performance. Cash budget acts as a standard for
evaluating the financial performance.
(6) Testing the
Influence of proposed Expansion Programme. Cash budget
forecasts the inflows from a proposed expansion or investment
programme and testify its impact on cash position.
Sound Dividend Policy. Cash budget plans for cash dividend to
shareholders, consistent with the liquid position of the firm. It
helps in following a sound consistent dividend policy.
Basis of Long-term Planning and Co-ordination. Cash budget helps
in co-ordinating the various finance functions, such as sales,
credit, investment, working capital etc. it is an important basis of
long term financial planning and helpful in the study of long term
financing with respect to probable amount, timing, forms of security
and methods of repayment.