Company Cash Budget

Its main value is highlighting the periods of imbalance between cash coming in and cash going out, so that the manager can take early action to manage the cash position. There are different areas that might have significant impact on the business strategies which might later lead to uncertain situations. These areas include marketing, research and development or strategic alliances with other firms in the industry. There are three basic reasons for seeking outside financing: start-up financing, expansion financing and work-out financing. It is highly essential to understand the main reason behind the requirement of outside financing and based on the reason we can proceed with seeking outside financing.

It is not easy to figure out the ‘minimum’ cash needed at any one time because of a second, conflicting objective in managing cash. Besides the desire for profitability, there is need for liquidity. Liquidity, in the form of a large cash balance (or, less certainly, a line of credit), provides the firm with the ability to handle unfavorable variances from projections.

A good back up plan is highly essential to provide financial boost and support during these critical months. Let’s take an example when a company would have few concerns in the months of March and April. Considering the company’s conventional case for March and April 10% to be collected every month which implies in the month of March the income would be only $25,000 (10% of $250,000). Further considering the minimum amount of $50,000 (cash in hand) the total amount would be $75,000 ($25,000+$50,000). However, when the expenses are calculated for the month of March, the sum figures out to be $75,000 ( Salaries 35k + Lease 15k +Depreciation 15k +Miscellaneous 10k). Thus, the cash in hand remains zero. Further, when the income and expenses are calculated for the month of April the result gets more devastated and the trend negative trend follows till the month of August.