4.3 Cash Planning: Cash Budgets

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The cash budget, or cash forecast, is a statement of the firm’s planned inflows and outflows of cash. Managers use the cash budget to estimate the firm’s short-term cash requirements, with particular attention to planning for surplus cash and for cash shortages.

Typically, the cash budget covers 1 year, divided into smaller time intervals. The number of intervals depends on the nature of the business. The more seasonal and uncertain a firm’s cash flows, the greater the number of intervals. Because many firms are confronted with a seasonal cash flow pattern, the cash budget is quite often presented on a monthly basis. Firms with stable patterns of cash flow may use quarterly or annual time intervals.

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