Question

Discuss the use of a cash budget as a cash management tool. Explain the cash budget’s value in clarifying risks and opportunities. Explain the purpose of a specialized budget, including a tax budget. Demonstrate the importance of including specialized budgets in the comprehensive budget

Answer 1

• The use of a cash budget can be a very effective cash management tool. Cash budgets are particularly important in cases where cash flows are not periodic, and are instead affected by seasons or other factors. A cash budget rearranges budget items to show each month in detail.

• Cash budgets, due to their specificity and the details they include, can be valuable in clarifying risks and opportunities. They can allow you to more accurately identify the expenses of each month, and therefore, plan for the future. Moreover, it also allows you to see remedies that might not be obvious at first glance.

• The purpose of a specialized budget is that it allows you to focus on a single financial aspect or goal. It allows you to segregate the income and expenses from a comprehensive budget. Finally, a specialized budget allows you to track a particular activity and relate it to a specific goal.

• It is important to include specialized budgets in the comprehensive budget in order to learn more about the particular activities that make up the comprehensive budget. It can be useful to isolate a particular activity or the progress towards a specific goal in order to better understand the role it plays on your larger financial picture.