A cash budget is the projection of a company’s cash receipts and disbursements over some future period. It is typically prepared on an annual basis and subdivided into months. However, a more detailed and refined cash budget can be prepared on a weekly or even daily basis to determine the amount of short-term funds a firm may need to borrow to cover any projected cash shortages. It also indicates the periods when the firm may have cash surpluses.

The first step in cash budget preparation is the estimation of cash receipts, which results directly from the sales forecast. The next step is scheduling of disbursements, or payments the firm must make to others. After cash receipts and disbursements have been estimated, the next step in the cash budgeting process is the determination of a desired cash balance at the beginning of each month. This minimum cash balance figure is usually a function of several factors, including the nature of the business, tax laws, and bank requirements. Short-term and long-term cash needs can be separated. A company’s cash budgeting system depends on its business and its accounting procedures. In recent years, many companies have developed computerized financial spreadsheet models that are used in constructing and analyzing cash budgets.

Is it possible for a profitable business to grow itself into bankruptcy? Please explain.

References

Brigham, E. F., & Ehrhardt, M. C. (2014). Financial management: Theory and practice (14th ed.). Mason, OH: South-Western.

Gitman, L., & Zutter, C. J. (2014). Principles of managerial finance (14th ed.). Boston, MA: Pearson.