What is the primary purpose of a cash budget?

The primary purpose of a cash budget is to identify cash requirements and cash sources for a certain period of time. A cash budget serves as a financial plan that projects the cash inflows and outflows over a specific period, allowing organizations to anticipate their cash needs accurately. By tracking expected cash receipts (sources) and cash payments (requirements), it helps in managing liquidity effectively and ensuring that the organization can meet its financial obligations as they arise.

This proactive approach enables organizations to plan for any shortfalls in cash flow, enabling them to take corrective actions, such as arranging financing or adjusting expenditure. It also aids in optimizing the use of cash by identifying periods of surplus, which can then be invested or used to pay down debt, thereby improving overall financial health.

While evaluating investment alternatives, determining profit margins, and managing accounts payable are all important aspects of financial management, they are not the primary focus of a cash budget. The cash budget specifically zeroes in on cash management, making it a critical tool for maintaining operational liquidity and solvency.