Definition: The Cash Budget is a budget prepared to estimate the cash inflows and outflows during a specific period of time. In other words, cash budget shows the cash inflows and cash outflows expected to occur in the immediate future period.
The purpose of preparing the cash budget is to determine that whether the enterprise has sufficient cash balance to meet out its short-term cash requirements or whether too much cash is being left idle and unproductive in the organization. Thus, it helps the management to determine the surplus and shortage of funds so that suitable actions can be undertaken.
One of the major advantages of cash budget is that it provides a clear picture of all the expected cash flows, thereby enabling the firms to plan their expenditures accordingly. Also, the companies can raise adequate funds in case of the shortage of the cash balance and can make an optimum utilization of funds in case of cash surplus, for example investing in marketable securities.
But however, these cash budgets are not free from the limitations. These are less reliable as the future is uncertain and the cash forecast may not be correct. For example, unseen demands of cash, delayed cash collection, unanticipated cash disbursements, etc. Also, the cash budget is inefficient to track a significant movement in the working capital items.