A Cash Budget is a summary statement of the firm's cash inflows and cash outflows over a projected period of time. It is a mere forecast of the cash position of a firm for a definite period. It involves a projection of future cash receipts and cash disbursements of over various time intervals.


The following are the main functions of a cash budget

 1. Determining the future cash requirements of the firm.

 2. Planning for financing the cash needs of the firm.

 3. Exercising control over cash and liquidity of the firm.



A cash Budget is an extremely useful tool for management maintaining control over cash position. It helps the management determine the future cash needs of the firm; plan the financing of those needs and exercise control over the cash liquidity of the firm. It enables the firm to meet its commitment in time and at the same time prevent accumulations of unnecessary surplus cash balance with it. The significance of the cash budget may be as follows:

Helpful in Planning:

It is helpful in planning the most efficient use of cash. It enables the firm to arrange for the deficient of cash from various possible sources to meet its obligations time, or to invest the surplus money profitably without any threat to the liquidity of the firm.

Helpful in Determining Future Cash Needs:

A cash budget helps the management in determining the future cash need of the firm, its timings and the amount of cash well in advance. A cash budget, therefore, helps the management in planning fat raising the necessary funds from the most profitable reasonable terms and costs.

Helpful in Exercising Control over Cash:

A cash budget also helps management in exercising effective control over cash expenditures and cash receipts. Thus, helps in maintaining the liquidity of the firm and also in controlling the mishandling of cash.

Evaluation of Financial Performance: 

The cash budget also helps in evaluating the financial performance of the firm. This is done by comparing the actual figures with the budgeted figures. Positive deviations will show efficiency in the financial performance of the business.

Helpful in Testing the Productivity of Proposed Expansion Programme: 

A cash budget is also helpful in testifying the productivity of proposed projects or expansion programs. This is done by making a comparison between the budgeted and actual figures of cash inflows.

Determination of Sound Dividend Policy

The cash budget helps in determining a sound dividend policy, as it plans for cash dividends to the company shareholders in accordance with the liquid position of the company.

Basis of Long-term Planning: 

A cash budget serves as an important basis of long-term financial planning and is significantly helpful in establishing coordination between functions such as sales, various finance credit, investment, working capital, etc.

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