Cash budgets and target cash balances in financial planning

¶ … Cash budget and target cash balance

The target cash balance is defined as the ideal cash amount a company intends to hold in its reserve at a given time. This figure seeks to strike a balance between the balance sheet costs of extremely little and too much cash. While a company with surplus cash at hand may misuse on investment opportunities, a company with poor cash will often be forced to make undesirable transactions to create more operating capital (Besley & Brigham, 2011). Individual investors are advised to set their target balance too. They may estimate at least the percentage of their holdings in cash to avoid such pitfalls.

Cash budget refers to the operating budgets and capital expenditures. It begins with the initial cash balances then cash inflows are added to the available cash. Cash outflows will then be subtracted to obtain the cash balance. If the cash balance falls below the company's intended balance, the financing segment will show the required borrowing. The financing segment covers debt payments among them interest payments. The financing activity adjusts the cash balance to obtain the ending cash balance (Ehrhardt & Brigham, 2009).

Compare and contrast the cash budget and long-term financial planning

Both long-term financial planning and cash budget focus on the financial health of an organization. While the cash budget process entails a routine review of annual expenditures, long-term financial planning involves an evaluation process identifying areas that require funding. Budgeting managers are given instructions on possible spending increases and limits while financial planning managers renew programs that produce material results (Brigham & Houston, 2012).

Second student

Compare and contrast the cash budget and long-term financial planning

While both cash budget and long-term financial planning are vital tools in the creation of a stable financial situation of a company or individual, each of them satisfies defined benefits. Cash budgets enable companies to handle daily expenses and costs in a way that keeps operations moving. On the other hand, financial planning enables companies to have a goal or a designation for this movement. In turn, it enhances the work of the cash budget (Brigham & Houston, 2012).

Third student

Cash budget and target cash balance

A cash budget refers to a schedule that allows cash flows such as disbursements and receipts for a business over certain duration. The net cash loss or gain for the duration is calculated as total collections less the total payments for the same duration. The target cash balance refers to the desired cash balance that a company intends to maintain to conduct its operations (Ehrhardt & Brigham, 2009).

Compare and contrast the cash budget and long-term financial planning

Both cash budget and long-term financial planning seek to maximize the efficient use of capital to expand operations and create shareholder value. Cash budgets illustrated categorical spending only while financial planning illustrates the purpose of the funds, the goals, and evidence of effective usage. It also informs investors that a company is open about its financial condition and that it is responsible for how taxpayer's money is being used (Brigham & Daves, 2012). Therefore, long-term financial planning is the most effective tool companies have to establish accountability and achieve results.

Reflection

These questions concentrate on the mechanisms of calculating figures entering into cash budget and target cash balance. Then these figures are used to prepare a cash budget for outflows, target cash balances and inflows (Ehrhardt & Brigham, 2009). Cash budgets and target cash balances connect to the budget calculations covered in this chapter highlighted as:

I. Cash budgets are relevant for budgeting sales and receipts

II. The Target cash balance provides details from which wages and purchases and prepared (Ehrhardt & Brigham, 2009).

The timing of cash budgets and target cash balance is as important as their value. Major issues in preparing cash budgets include timing of payments from debtors, timing of receipts from trade debtors, and calculating VAT refunds and payments (Brigham & Houston, 2012). Cash budgets, target cash balance, and long-term financial planning are relatively straightforward. However, they should be taken to exclude non-cash costs like depreciation from cash budgets. Often, it is necessary to utilize figures, which are constrained in the working capital segment of a company's long-term financial planning and the cash budget (Ehrhardt & Brigham, 2009).