What is a cash budget? How it is useful in managerial decision making?

A proper control over cash is very essential. Cash is an important component in any activity. The control becomes inescapable. If cash is not properly managed or if it is mismanaged, the ultimate result would be disastrous. In many times and in many business situations, business failures are noticed due to the lacunae found in the cash management. Hence cash budgeting occupies a pivotal place in the study of Financial Management.

Cash budgeting is the process of forecasting the expected receipts known as cash inflows, and expected payments known as cash outflows to meet the future obligations. The written statement of receipts and payments is known as the cash budget. It is a crystal ball which enables one to observe the future movements in cash position. It is a mere forecast of cash position of an undertaking for a definite period of time. The period may be daily, weekly, monthly, quarterly, semi-annually, or annually. The major two components of cash budget would be forecast first the cash receipts and then second forecasting the cash disbursements.

The receipts of cash are formatted as follows:
1. Opening balance of cash in hand and cash at bank
The Management Accounting Perspective of the Business Enterprise
The management accounting view of business may be divided into two broad categories: (1) basic features and (2) basic assumptions.
 

Basic Features
The business firm or enterprise is an organizational structure in which the basic activities are departmentalized as line and staff. There are three primary line functions: marketing, production, and finance. The organization is run or controlled by individuals collectively called management. The staff or advisory functions include accounting, personnel, and purchasing and receiving. The organization has a communication or reporting system (e.g. budgeting) to coordinate the interaction of the various staff and line departmental functions. The environment in which the organization operates includes investors, suppliers, governments (state and federal), bankers, accountants, lawyers, competitors, etc.)

A commonly used approach is to classify management into three levels: Top management, middle management, and lower level management. The significance of a hierarchy of management is that decision‑making occurs at three levels. Basic Assumptions in Management Accounting The framework of management accounting is based on a number of implied assumptions. Although no single work has attempted to identify all of the assumptions,
. Five categories of assumptions will be presented:
1. Basic goals
2. Role of management
3. Nature of Decision‑making
4. Role of the accounting department
5. Nature of accounting information

Basic Goal Assumptions - The basic goals or objectives the business enterprise may be multiple. For example, the goal may be to maximize net income. Other goals could be to maximize sales, ROI, or earnings per share. Management accounting does not require a specific of type of goal. However, whatever form the goal takes, management will at all times try to achieve a satisfactory level of profit. A less than satisfactory level of profit may portend a change in management.

Role of Management Assumptions - The success of the business depends primarily upon the skill and abilities of management–which skills can vary widelyamong different managers. The business is not completely at the mercy of market forces. Management can through its actions (decisions) influence and control events within limits. In order to achieve desired results, management makes use of specific planning and control concepts and techniques. Planning and control techniques which management may use include business budgeting, cost‑volume‑profit analysis, incremental analysis, flexible budgeting, segmental contribution reporting, inventory models, and capital budgeting models. Management, in order to improve decision‑making and operating results, will evaluate performance through the use of flexible budgets and variance analysis.

Decision‑making Assumptions ‑ A critical managerial function is decisionmaking. Decisions which management must make may be classified as marketing, production, and financial. Decisions may also be classified as strategic and tactical and long‑run and short‑run. A primary objective of decision‑making is to achieve optimum utilization of the business’s capital or resources. Effective decision‑making requires relevant information and special analysis of data.

Accounting Department Assumptions ‑ The accounting department is a primary source of information necessary in making‑decisions. The accounting department is expected to provide information to all levels of management. Management will consider the accounting department capable of providing data useful in making marketing, production, and financial decisions. 

Nature of Accounting Information - In order for the accounting department to make meaningful analysis of data, it is necessary to distinguish between fixed and variable costs and other types of costs that are not important in the recording of business transactions. Some but not all of the information needed by management can be provided from financial statements and historical accounting records. In addition to historical data, management will expect the management accountant to provide other types of data, such as estimates, forecasts, future data, and standards. Each specificmanagerial technique requires an identifiable type of information. The accounting department will be expected to provide the information required by a specific tool. In order for the accounting department to make many types of analysis, a separation of costs into fixed and variable will be required. The management accountant need not provide information beyond the relevant range of activity.