Cash Budgeting As A Basis For Making A Decision

BACKGROUND STUDY
Cash is represented by those monetary items immediately available to management for business purposes. Cash includes commercial and savings deposits in banks and else where, available on demand and money items on hand that can be used as a medium of exchange or that are acceptable for deposit at face value by a bank. Cash is involved in most business transactions. This is due to the nature of business transactions, which include a price and conditions calling for settlement in terms of medium of exchange.
For instance, the movement of cash completes almost all purchases and sales transactions. Purchases of goods and services normally result in cash payments while sales normally in cash receipts.
“Business and individuals have these primary motives for holding cash and these are the transactions motive, the precautionary motive and the speculative motive”.
(i) The transactions motives enables firms and companies to conduct their ordinary business making purchase and sales.
(ii) The precautionary motives depends on the predictability of cash flow and the ability of the company to borrow on short notice. This motive enables a firm to provide enough find as a protection against unexpected demand.
(iii) The speculative motive enables the organization to take advantage of such unexpected opportunities as may arise.

Moreover, sound making working capital management requires the maintance of adequate amount of cash for certain specific reason.
(i) Sufficient cash per nuts taking trade discount.
(ii) Adequate liquid assets are required to strengthen the current and acid test ratio which are key items in the appraisal of a firm’s credit worthiness.
(iii) To take advantage of profitable business opportunities as cash is a major requirement.
(iv) Adequate cash is necessary to provide a firm with sufficient liquidity to meet various emergencies.
It is disadvantageous to hold no cash. The costs appear less obvious and rather more difficult to quantities these include the inability of the firm to meet bills as they fall due, the opportunity cost of being unable to take any unexpected opportunities (like buying some cheap stock for cash) and cost associated with having to borrow cash at expensive short-term rates in order to satisfy unexpected urgent demand.
Whatever the cost, it is the responsibility of management to balance these costs with each other so as to ascertain and maintain that optional level of cash to be the use of such budgeting is one method of attaining this level.
This (cash budgeting) is usually done only a year in advance or on a monthly basis. The cash inflows and outflow estimated for cash period are identified and the likely cash balance projected from them. Steps cash then be taken at an early stage in the planning process to illustration.
Cash inflow January (N) February (N) March (N)
Debtors 10,000 11,000 110,000
Cash sales 2,000 2,000 2,000
Total inflow (X) 12,000 13,000 11,000

CASH OUTFLOW
Creditors 7,000 8,000 10,000
Wages 4,000 4,000 4,500
Total out flow 11,000 12,500 14,000

SURPLUS/DEFICIT
(X – Y) 1,000 500 (3,500)

CUMULATIVE
SURPLUS/DEFICIT 1,000 1,500 (2,000)

The above illustration shows that cash surpluses are expected in January and February where as in March, a deficit is expected. If there were no cash deficit is expected. If there were no cash in the bank on 1st January, the bank balance at the end of each month would be given by the cumulative surplus (deficit) figure above.
On the basis of this budget, management must decide on how it is going to overcome the March deficit and how to use the finance February, it should seek to ahead and budget and other financial management tools like current ratio and liquidity ration.
The management of a business enterprises is analogous in many ways to the deriving of an automobile. In the first place, routine came of the operating mechanism is required if it is to be accept in running order, Security, given suitable mechanical performance, the vehicle must be guided towards its predetermined objective, which in the case of the businesses is to make profits.
Finally, a proper supply of fuel must be maintained at all terms. “What gas lines is to the operation of the automobile, cash is to the business concern.
Management must be aware of its cash resources throughout a forth coming budget period if it is to be able to make proper decisions on topics such as:
(a) Capital expenditure
Expansion of the business
Raising of further capital
Payment of surplus.
Availability of cash in the limiting factor for many organizations and shortage of cash a rock upon whichever the most profitable business earn found.
In view of all the foregoing, cash budgeting becomes a necessity. In short, it become a sin-qua-non.

1.2 STATEMENT OF PROBLEM
Cash budgets are prepared to ensure that there will be sufficient cash in hand to cope adequately with budgeted activities. It may show that there is likely to be a deffence cash in some further period or that there is likely to be a surplus in further. When there is deficit each, management is faced with the problems of how, when and where to invest, the surplus cash. It is with a view to finding solutions to these problems that the researcher has undertaken this study with the purpose for solution to many business organization or enterprises.

1.3 OBJECTIVE OF THE STUDY
Liquidity is the management of cash resources to ensure that liabilities are paid as and when due. When a company holds too large cash, it has a number of costs associated with it for instance, cash could invested elsewhere to earn interest. Again, lack of cash may lead an otherwise a profitable company into a technical bankrupt a situation where an organization although viable and will be able to pay all its debts given enough time, cannot do so in the short term because of lack of cash.
By the use of cash budgets, a balance is therefore struck i.e. between holding too little cash and large cash and two large cash. Therefore, cash budget achieve a number of objectives namely:
(a) It informs an organization of its cash position at any point in time.
(b) In time of deficit cash, an organization earn plan on how to make good of the deficit. It can be in a position to apply for a short-term loan or overdraft from any financial institution, or aslays the payments of creditors. It can also sell its budget activities.
(c) In time of surplus cash, an organization can reasonably afford to must the surplus to earn income without harming the payment of its matching liabilities. Sources of the short term investment include bank deposits, purchase of marketable securities, treasury bills purchases, loans to building securities, deposit with discount houses, finance companies and merchant banks.
All business cash is domiciled in a current account except now that banks are required to pay interest on current account it would be improper to ask firms to lodge idle cash in current account.
In a nutshell, cash budget is aimed at achieving the following summaries objectives:
(i) To indicate the problem cash position as a result of planned operations.
(ii) Top indicates excess cash or cash shortage.
(iii) To indicates the need for borrowing or the on ability of idle cash for investment.
To co-ordinate cash with;
(a) Total working capital
(b) Sales
(c) Investment
(d) Debt.
To establish a sound basis for credit:
To establish a sound basis for continuing of this cash position.

1.4 SIGNIFCANCE OF THE STUDY
The significance of the cash budgeting including the following:
(a) Cash budgeting instead in executives as well the subordinated the habit of basing decisions on investigation studies and research.
(b) It provides the yardstick for control of operations in business firm or organization.
(c) It makes possible the control over operations revenue and costs.

1.5 LIMITATION OF STUDY
In carrying out this work, the researcher encountered lost of problems. The first was money. A huge amount of money was needed in question because a lot of question has to be asked so as to know how to write or carry out thee topic.
Another limitation or constraint was in form of time. The time allocated for the research work was not enough us to enable the researcher give an in depth treatment to it.
The third out final prominate problem was that of inadequate of text look in the library to ensure adequate research work.