INTRODUCTION :

Traditionally, businesses have believed that profits indicate success. While it is true that profits
are one of the key indicators of success, many are now starting to realize that there is something
more fundamental to their very survival; and that is cash. Cash is King- And this holds true
for every business irrespective of its size. The availability of cash balances is a key determinant
of a companys competitive ability, because it provides the means to invest in people, technology,
and other assets. Efficient Cash Management is therefore indispensable.

WHAT IS CASH MANAGEMENT?

Cash Management comprises of a series of activities aimed at efficiently handling the inflow and
outflow of cash. This mainly involves diverting cash from where it is to where it is needed. In
other words, cash management is the optimization of cash flows, balances and short term
investments. Cash in this context, may refer either to cash in the form of currency, or to other
equivalents such as cheques, drafts, deposits, among others. While organizations may hold other
assets which can potentially be converted to cash, cash management essentially deals with the
management of liquid cash and near-cash assets such as marketable securities and time deposits,
which can be readily converted to cash. The primary feature of such cash balance is that it has no
earning power. Nonetheless, it is crucial to organizations for three main reasons: 1. Transaction:
Ready cash balances are vital for routine transactions including purchases, operating expenses,
wages, and other payments such as dividends, taxes and so on. 2. Precaution: There may be
unanticipated cash requirements as a result of sudden increase in inventory costs, delay in
collection of receivables, among others. And maintaining ready cash balances is essential to deal
with such unforeseen expenses. 3. Speculation: Reserving cash balances is also crucial when

firms anticipate decline in prices of raw materials, reduction in interest rates for buying
securities, availing early payment discounts, among others.
WHY CASH MANAGEMENT?
Lack of control over cash flows and inefficient cash management can be very harmful to
business. More often than not, it is the improper management of cash that has caused businesses
to fail. Effective cash management is therefore a necessity for businesses.
Companies heavily rely on knowing their cash position to manage working capital requirements
such as ordering inventory, raw material, or acquisitions/expansion program, for which they need
a clear idea of how much cash is required, and when. This is enabled by efficient cash
management.
Moreover, a companys cash position is said to be a better indicator of the health of its business,
rather than its profit and loss statement. Hence knowing the cash position is crucial for every
business to:
forecast when, how, and where cash needs may arise
determine which would be the best source for additional cash needs, and
be prepared to meet cash needs when they arise And for better visibility into the cash position
across banks, across borders, cash management is crucial. It empowers businesses with the
ability to forecast cash flows, plan future business strategies, and manage cash accordingly.

PREPARATION OF CASH BUDGET:

Usually the responsibility of preparing the cash budget lies on the treasurer or other financial
executive. Cash budget has to be prepared by estimating cash receipts & cash payments.
ESTIMATING CASH RECEIPTS:
Cash is received on the following accounts:
a)
b)
c)
d)
e)

Cash sales
Collection from debtors
Interest/ Dividends on Investment
Sale of Assets
Loans, Advances, Deposits etc.

ESTIMATING CASH PAYMENTS:

Cash payment is made on the following accounts:
a)
b)
c)
d)
e)
f)
g)

Payment for Purchases

Payment for overheads
Purchase of Assets
Payment to Creditors
Payment for taxes
Payment for Dividend/ Interest etc
Repayment of loans / advances/ deposits etc

ILLUSTRATION :
CASH BUDGET OF FASHION FABRICS LIMITED FOR APRIL ,MAY & JUNE,2014.
MONTH

SALES

2014

RS

PURCHASE
S

WAGES

EXPENSES

RS

RS

RS

JANUARY (ACTUAL)

80000

45000

20000

5000

FEBRUARY (ACTUAL)

80000

40000

18000

6000

MARCH (ACTUAL)

75000

42000

22000

6000

APRIL ( BUDGETED)

90000

50000

24000

7000

MAY ( BUDGETED)

85000

45000

20000

6000

JUNE ( BUDGETED)

80000

35000

18000

5000

ADJUSTMENTS:
i.
ii.

10% of the Sales & 20% of the Purchases are for cash.
The average collection period of the company is month & the credit purchases are paid

iii.
iv.

off regularly after 1 month.

Wages are paid half monthly & the rent of Rs. 500 included in expenses is paid monthly.
Cash & bank balances as on April 1, was Rs. 20000.

CASH BUDGET
FOR THREE MONTHS ENDING 30TH JUNE.
PARTICULARS
RECEIPTS:
BALANCE b/d
CASH RECEIPTS

APRIL
RS

MAY
RS

JUNE
RS

20000
9000

29650
8500

39900
8000

CASH FROM

74250

78750

74250

DEBTORS
CASH AVAILABLE

103250

116900

122150

PAYMENTS:
CASH PURCHASES
ACCOUNTS

10000
33600

9000
40000

7000
36000

23000
6500
500
73600
29650

22000
5500
500
77000
39900

19000
4500
500
67000
55150

PAYABLE
WAGES
EXPENSES
RENT
TOTAL PAYMENT
BALANCE c/d
WORKING NOTE:
PURCHASES:

20% CASH
80%CREDIT
TOTAL

JAN

FEB

9000
36000
45000

8000
32000
40000

JAN

FEB

8000
72000
80000

8000
72000
80000

MAR
8400
33600
42000

APRIL
10000
40000
50000

MAY
9000
36000
45000

JUNE
7000
28000
35000

SALES :

10% CASH
90%CREDIT
TOTAL

MAR
7500
67500
75000

APRIL
9000
81000
90000

MAY
8500
76500
85000

JUNE
8000
72000
80000

COLLECTION FROM DEBTORS:

JAN

FEB

72000

72000

67500

81000

76500

72000

90%
SAME

36000

36000

33750

40500

38250

36000

MONTH
NEXT

36000

36000

33750

40500

38250

MONTH
TOTAL

36000

72000

69750

74250

78750

74250

CREDIT

MAR

APRIL

MAY

JUNE

SALES

PAYMENT OF WAGES:

WAGES
SAME

JAN
20000
10000

FEB
18000
9000

MAR
22000
11000

APRIL
24000
12000

MAY
20000
10000

JUNE
18000
9000

MONTH
NEXT

10000

9000

11000

12000

10000

MONTH
TOTAL

10000

19000

20000

23000

22000

19000

INTERPRETATION:
Receipts of fashion fabrics are more than its payments. It has enough cash balance to make all its
payments. Total cash sales account for 10% & purchases account for 20% while all other sales &
purchases are on credit basis. Payment to creditors are paid regularly after 1 month. Collection
from debtors are made in same month & in next month i.e 50% of sales is received in same
month while remaining 50% is received in next month. Rent is paid on monthly basis. Wages are
paid 50% in same month & remaining 50% in the next month.