Page 130 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 8: Cash Planning

These and many other similar resulting measures of cash planning not only made the Notes
future path of Rathore’s business easy, but also made him withstand the financial pressures
and sail out of them safely.
Source: hitchstoriesofsmallbusinesses.co.in

Task On the basis of the above discussion analyse and discuss why cash flow is planning
important.

Self Assessment

State whether the following statements are true or false:

1. The cash planning is an estimation of the flows in and out of the firm’s cash account over
a particular period of time, usually a quarter, month, week, or day.
2. Cash forecasting enables them to anticipate periods of surplus cash and periods where
financing will be necessary.
3. A cash plan for a centralized organization should include, for the month ahead, a daily
forecast of cash outflows and cash inflows.
8.2 Cash Budget Simulation

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.

!
Caution When preparing your cash budget, you remember
1. To make the ending cash balance the beginning cash balance for the next period
2. To factor any additional material, labor or other expenses for projected sales
3. To keep your sales goal for the period realistic

4. To adjust accounts receivable for possible uncollectible amounts
5. To include taxes in expenditures for payroll
There are three main components necessary for creating a cash budget. They are:

1. Time period
2. Desired cash position
3. Estimated sales and expenses

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