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10.5 : Cash Budget II

A cash budget is essential for organizations to manage their cash flow effectively. It comprehensively estimates cash inflows and outflows over a specific period. By forecasting available cash, businesses can strategically plan expenditures, anticipate cash shortages, and mitigate risks related to overdrafts or emergency borrowing.

Consider a small manufacturing company that produces custom furniture. This company projects that over the next three months, it will receive $150,000 from customer payments. However, it anticipates expenses of $120,000 during the same period, including $60,000 for raw materials, $30,000 for employee salaries, $15,000 for rent, and $15,000 for utility bills and other overhead. While the overall cash flow seems positive, the timing of cash receipts and payments can present challenges.

For instance, if a significant portion of the customer payments is expected towards the end of the three-month period, but raw material costs and salaries are due earlier, the company might face cash shortages despite having sufficient projected income. By using a cash budget, the company identifies this potential gap and can plan accordingly by negotiating extended payment terms with suppliers or arranging short-term financing. This ensures the company can continue operations smoothly without financial disruptions.

Etiketler

Cash BudgetCash Flow ManagementCash InflowsCash OutflowsFinancial ForecastingExpenditure PlanningCash ShortagesManufacturing CompanyCustomer PaymentsRaw MaterialsEmployee SalariesUtility BillsFinancial RisksShort term Financing

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10.5 : Cash Budget II

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