What is the purpose of a cash budget?

A cash budget is a financial tool that outlines expected cash inflows and outflows over a specific period. Its primary purpose is to ensure the business can consistently meet its financial obligations. This involves projecting cash receipts and payments to manage liquidity effectively. By doing so, the business can anticipate shortfalls or surpluses, allowing management to make informed decisions about cash management, such as when to borrow or invest cash and how to handle operational expenses.

Developing a cash budget helps in identifying the times when cash may be tight and enables businesses to plan accordingly. This is crucial for maintaining operational stability, meeting payroll, paying suppliers, and fulfilling other immediate financial responsibilities without disruptions.

While maximizing profits, planning for long-term investments, or providing frameworks for employee salaries are important business functions, these elements are more related to overall financial strategy rather than the specific purpose of a cash budget, which is primarily concerned with liquidity management and ensuring that the organization can meet its short-term obligations.