Explain one purpose of preparing a cash budget. [2]
Question
Explain one purpose of preparing a cash budget. [2]
Solution
One purpose of preparing a cash budget is to forecast the company's cash inflows and outflows over a certain period of time. This helps the company to plan its future activities and avoid any potential liquidity issues.
Step 1: Forecast Cash Inflows The first step in preparing a cash budget is to estimate the company's cash inflows. This includes revenues from sales, returns on investments, and other sources of income.
Step 2: Forecast Cash Outflows The next step is to estimate the company's cash outflows. This includes expenses such as salaries, rent, utilities, taxes, and other costs.
Step 3: Compare Inflows and Outflows The final step is to compare the forecasted inflows and outflows. If the inflows are greater than the outflows, the company will have a positive cash balance. If the outflows are greater, the company may need to find ways to increase inflows or decrease outflows.
By preparing a cash budget, the company can ensure it has enough cash to meet its obligations and can plan for any potential shortfalls.
Similar Questions
What is the primary purpose of creating a budget?a) To track spending habits only b) To determine your net worth c) To plan and control your income and expenses d) To invest in the stock market
All of these are ways in which the cash budget can assist decision making, except:Group of answer choicesidentifying suitable times for the purchase of non-current assets.assisting with the planning and use of borrowed funds.showing the assets and liabilities owned by the firm.identifying periods of expected cash shortages or surpluses.
Preparing a cash budget is part of the process. A. control B. cash C. monitoring D. planning
Cash budget
What is the first step in creating a budget?*1 pointSetting financial goalsTracking all income and expensesCutting unnecessary expensesOpening a savings account
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