What information does a cash budget provide?

What information does a cash budget provide?

• A. It details the history of cash transactions
• B. It summarizes long-term capital investments
• C. It projects future cash inflows and outflows
• D. It focuses solely on fixed costs

Answer: (C)

A cash budget is a critical financial planning tool that focuses on forecasting future cash flows. It provides a projection of expected cash inflows and outflows over a specific period, which is essential for effective cash management. This projection helps organizations anticipate their liquidity needs, ensuring they can meet their obligations as they come due and plan for any potential shortfalls. By analyzing future cash flows, businesses can make informed decisions regarding investments, expenditures, and financing actions. This proactive approach allows management to allocate resources effectively, minimize borrowing costs, and optimize their cash position over time. While historical cash transactions, long-term investments, or fixed costs might be relevant to different aspects of financial planning or performance evaluation, they do not capture the core function of a cash budget, which is focused specifically on forecasting future cash movements. Thus, projecting future cash inflows and outflows illustrates the primary role of a cash budget in financial management.

A cash budget is a critical financial planning tool that focuses on forecasting future cash flows. It provides a projection of expected cash inflows and outflows over a specific period, which is essential for effective cash management. This projection helps organizations anticipate their liquidity needs, ensuring they can meet their obligations as they come due and plan for any potential shortfalls.

By analyzing future cash flows, businesses can make informed decisions regarding investments, expenditures, and financing actions. This proactive approach allows management to allocate resources effectively, minimize borrowing costs, and optimize their cash position over time.

While historical cash transactions, long-term investments, or fixed costs might be relevant to different aspects of financial planning or performance evaluation, they do not capture the core function of a cash budget, which is focused specifically on forecasting future cash movements. Thus, projecting future cash inflows and outflows illustrates the primary role of a cash budget in financial management.