Page 185 - DMGT409Basic Financial Management

Basic Financial Management

Notes 4. Investment of Surplus Cash: Whenever there is surplus cash it should be properly invested
in marketable securities, to earn profits. Firms should not invest in long-term securities;

they cannot be converted into cash within a short period.
11.4 Cash Planning or Cash Budget

Cash planning and control of cash is the central point of finance functions. Maintenance of
adequate cash is one of the prime responsibilities of financial manager. It is possible only through

preparation of cash planning.
Cash control is also included in cash planning. Since planning and control are the twins of
management. Cash planning is a technique to plan and control the use of cash.

Cash Forecasting and Budgeting

Cash forecast is used as a method to predict future cash flow because it deals with the estimation

of cash flows (i.e., cash in flows and cash outflows) at different stages and offers the management
an advance notice to take appropriate and timely action.
Cash budget is an important tool for the flow of cash in any firm over a future period of time.

In other words, it is a statement showing the estimated cash inflows and cash outflows over a
planning period. It pinpoints the surplus or deficit cash of a firm as it moves from one period to

another period. The surplus of deficit data helps the financial manager to determine the future

cash needs of the firm, plan for the financing of those needs and exercise control over the cash

and liquidity of the firm. Cash budget is also known as short-term cash forecasting.

Notes Steps Involved in Preparation of Cash Budget
Preparation of cash budget involves the following steps:
Step 1: Selection of period of time (planning horizon): Planning horizon is that period
for which cash budget is prepared. There are no fixed rules for cash budget preparation.

Planning horizon of a cash budget may differ from fi rm to firm, depending upon the size

of the firm. Cash budget period should not be too short or too long.

Step 2: Selection of factor that has bearing on cash fl ows: The factors that generate cash

flows are divided into two broad categories. (a) Operating, and (b) Financial.

1. Operating Cash Flows: Operating cash inflows are cash sales, collection of accounts

receivables and disposal of fixed assets and the operating cash outflows are bills

payables, purchase of raw materials, wages, factory expenses, administrative
expenses, maintenance expenses and purchase of fi xed assets.
2. Financial Cash Flows: Loans and borrowings, sale of securities, dividend received,
refund of tax, rent received, interest received and issue of new shares and debentures

cash outflows are redemption of loan, repurchase of shares, income tax payments,
interest paid and dividend paid.

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