Cash Budgetan Imperative Element of Effective Financial Management

By Amoako, Kwame Oduro; Marfo, Emmanuel Opoku et al. | Canadian Social Science, September 1, 2013 | Go to article overview

Cash Budgetan Imperative Element of Effective Financial Management


Amoako, Kwame Oduro, Marfo, Emmanuel Opoku, Gyau, Kelvin Evans, Asamoah, Felix Oppong, Canadian Social Science


Abstract

A firm's life highly depends on the availability of funds to meet impending obligations as well as efficient employment of excess funds so as to minimize wastages. This paper focuses on cash budgets as a tool that every financial manager should use in ensuring availability as well as effective utilization of cash. Whilst excess liquidity communicates a mangers lack of investment innovativeness, lack of funds to meet short term obligations could also depict a managers inability to plan on where and when to get adequate funds for business activities at a lower cost in the short term. Another area of interest in the paper is the role of effective financial management in any organization. Nevertheless, the paper concludes that cash budget preparations enable managers to identify possible future liquidity challenges and at the same time creates a platform for addressing such challenges.

Key words: Cash budgets; Effective financial management; Liquidity, Cash flow; Receipts; Payments

INTRODUCTION

A cash budget is a great tool in the hands of financial managers to alert management on future problems due to cash shortages or to the opportunities provided by cash surpluses. ACCA (2012) emphasises that cash , budget summarizes a firm s expected cash inflows and outflows over a period of time. By using the expected collection patterns and the planned cash receipts and payments for various expenditures, the cash budget Provides exPected cash deflcits ^ surPluses (Marf°Yiado"' & ,Darkwa' 2008f 0n *he contrary' even though financial managers recognize the essence of cash budgeting, several organizations underutilize this resourceful management tool especially in not-for-profit making organizations (Hauser, Edwards and Edwards, 1991). Even those who recognize the need for its preparations find it quite difficult in implementing what is r on paper (Schmidt, 2013). With regards to its preparations f and implementations, Walther (2013, p.l) states that r The process of budget preparation is sometimes seen as painful, and it is not always clear how the effort that is required leads to any productive output . Furthermore, the author explains that budgets can be regarded as imposing bamers that are challenging to manage and establishing goals that are hard to meet. Thus, those smaller firms with . " fewer sources of revenue and fewer items of expenditure may not experience much challenges. However, as far as multi.national corporations are concerned, it is a hideous task Schmidt (2013) again explains that this is due to the in the process of making forecast for each source of receipt and payment in the mist of uncertainties surrounding the business environment. Consequently, in ° n J' spite of these numerous opposing remarks, it is imperative that organizations carefully plan their financial affairs to achieve expected financial targets (Onuoha & Amponsah, 2012). These plans are generally expressed as budgets of which cash budget is rated in this paper as most vital of serves as an imperative tool for effective financial management. This is because Olajide and associates (2013) suggests that the cash budget is prepared to incorporate all the functional budgets and the capital expenditure budget. The impact of how good or bad a cash is managed have disastrous repercussions on operating activities (Olajide & associates, 2013). It therefore doesn't come as a surprise when Roth (2008) summarizes it all by asserting that the most essential thing that organisations can do with their money is to budget for it.

Riley (2012) clarifies that as part of financial management process, it is necessary that management makes available sufficient funding at the appropriate time to meet the needs of their organisations. He further puts it that in the short term, funding may be needed to invest in non-current assets as well as to meet capital requirements of any organizations. As such the cash budget which clearly outlines the sources, timing and value of impending cash flow becomes an indispensable tool in financial management process. …

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