A cash budget records the cash inflows and outflows expected to occur in the respective functional year. It suffices for the purposes of estimating, planning and laying control for the use of the cash flows of the company for the functional year. The cash budget preparation and development employs the technique that approaches budgeting through the functional units. The budgeting process, as such, involves the estimation of the expected cash inflows and cash outflows for the respective functions in the company. The budgeting process integrates the concepts of accruals and prepayments. The expected accruals and prepayments that would fall within the functional time are taken into consideration. The cash budget would be developed to give guidance on the expenditures and the incomes. It shows the expected sources of income and funds and the consequential use of the accumulated funds.
The cash budget borrows from the departmental budgets such as the sales budget, the production budget and the non production budget. It is from these other budgets that the expected cash inflow and outflow values for the functional time are obtained. The cash budget balances the expected inflows and the outflows. The application of other budget values and figures causes the main limitation of the cash budget. In the event of miscalculations from other budgets say from the sales budget, it implies that the inflows from expected sales in the cash budget would be erroneous. This, therefore, limits the cash budget to the accuracies of the other budgets that give the primary inputs in terms of expected inflows and outflows. A miscalculation could potentially affect the firm since the expected cash flows are affected. This is what leads to variances in operations. Where the miscalculation is adverse, the variances are adverse and could potentially cause a halt in the firm’s overall operations.
Budgetary planning and control
The budgetary process essentially allows the firm to devise the control and planning mechanisms. Through the budgets, the firms are able to set the benchmarks that they expect to follow. The process suffices for the purposes of control since the activities and operations of the firms are consequently regulated in accordance to the budgeted plans. The control process also entails the analysis of operations to identify variances of the actual output from the budgeted output. The budget process is used to state the expected output and input. The firm then undergoes to produce relative to the planned output and input.
An example of the planning and control application in budgeting could be given in the form of the production budgeting. The cost accountants estimate the expected output. They then calculate the required materials and overheads for the production of the output. This process entails budgeting. It sets the benchmarks to be used by the firm during the execution of the operations. The variances of the actual inputs and outputs are then compared and the reasons for the variances investigated. Appropriate action is then taken. This is the process of control. It should be appreciated that the process of planning occurs during the actual budgeting. The process of control then follows. It arises from the execution of the budgeting process. The budgetary planning and control process enables the firm to make the best use of its limited resources and effectively regulate its activities and stay on course in the achievement of its objectives. However, over reliance on the budgets minimizes innovation and creativity as the processes have to follow a definite, predetermined path.
Davis, C. E., & Davis, E. B. (2010). Managerial Accounting for Strategic Decision Making. New York: John Wiley & Sons.
Smith, J. A. (2007). Handbook of Management Accounting. New York: Elsevier.