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If there are any unusually large cash balances indicated in the cash budget, these balances are
dealt with in the financing budget, where suitable investments are indicated for them. Similarly, if
there are any negative balances in the cash budget, the financing budget indicates the timing and
amount of any debt or equity needed to offset these balances.
An estimation of the cash inflows and outflows for a business or individual for
a specific period of time. Cash budgets are often used to assess whether the
entity has sufficient cash to fulfill regular operations and/or whether too much
cash is being left in unproductive capacities.
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Week 2
Week 3
Week 4
$25,000
$55,000
-$24,000
-$63,000
+10,000
+12,000
+15,000
+18,000
+180,000
+185,000
+180,000
+192,000
+30,000
+10,000
+25,000
$245,000
$252,000
$181,000
$172,000
-$87,000
-$91,000
-$99,000
-$107,000
- Direct labor
-19,000
-20,000
-23,000
-25,000
- Manufacturing overhead
-29,000
-30,000
-34,000
-37,000
-35,000
-35,000
-38,000
-38,000
- Asset purchases
-20,000
-50,000
-100,000
-$190,000
-$276,000
-$244,000
-$207,000
$55,000
-$24,000
-$63,000
-$35,000
Beginning cash
Sources of Cash
+ Cash sales
+ Accounts receivable collected
+ Asset sales
= Total cash available
Uses of Cash
- Direct materials
- Dividend payments
The example shows that an inordinately large dividend payment in the second week of the cash
budget, coupled with a large asset purchase in the following week, places the company in a
negative cash position. Paying out such a large dividend can be a problem for lenders, who do not
like to issue loans so that companies can use the funds to pay their shareholders and thereby
weaken their ability to pay back the loans. Thus, it may be wiser for the company to consider a
small dividend payment and avoid a negative cash position.
Other Cash Budget Issues
Cash balances may fluctuate considerably within a single accounting period, thereby masking cash
shortfalls that can put a company in serious jeopardy. To spot these issues, it is quite common to
create and maintain cash forecasts on a weekly basis. Though these short-term budgets are
reasonably accurate for perhaps a month, the precision of forecasting declines rapidly thereafter,
so many companies then switch to budgeting on a monthly basis. In essence, a weekly cash
budget begins to lose its relevance after one month, and is largely inaccurate after two months.
Related Topics
Budgeted balance sheet
Budgeted income statement
Ending finished goods budget
Master budget
Production budget
Sales budget