Cash Budget II

A cash budget estimates and plans an organization's cash inflows, outflows, and liquidity over time.

Consider Fresh Mart, a small retail store preparing its cash budget for January.

The store expects cash inflows of fifty thousand dollars from sales and five thousand dollars from a short-term loan.

It plans various cash outflows, such as twenty thousand dollars for purchasing inventory, ten thousand dollars for employee salaries, and seven thousand dollars for rent.

The store arrives at a net cash flow of eighteen thousand dollars by calculating the difference between cash inflows and outflows.

The store can decide how to utilize the extra cash of this surplus. It could reinvest in additional inventory, pay off debt, or invest in short-term investments.

In contrast, if sales are expected to be twenty thousand dollars, the store could face a twelve thousand dollar shortage.

The store could take corrective actions, such as arranging for additional short-term financing or postponing non-essential expenses.

Through this cash budget, the store ensures smooth day-to-day operations, avoids liquidity problems, and makes informed decisions regarding its available cash resources.