What is the primary purpose of a cash budget?

The primary purpose of a cash budget is to project cash inflows and outflows. This tool is essential for organizations as it helps management ensure that there is enough cash available to meet current and future operational needs. By forecasting cash flows, a business can plan for upcoming expenses and manage liquidity effectively, helping to avoid cash shortages that could hinder operations.

In preparing a cash budget, businesses estimate expected cash receipts from sales and other sources, as well as expected cash payments for expenses. This forward-looking approach enables organizations to make informed decisions, such as when to invest excess cash, when to delay expenditures, or whether to seek additional financing.

Understanding cash flow projections aids in maintaining solvency and planning for contingencies, making the cash budget a critical component of effective financial management.