Cash is the most liquid and significant assertion for every organization. The cash budget is a forecast of management regarding the expected cash flows in the organization during the budgeted period. Cash inflows may include cash receipts due to revenue and cash outflows may include cash out flows due to expenses and purchases (Cash management, 2015). It may also include cash out flows due to financial and investing activities. Cash budget provides an estimate whether the organization will have sufficient cash after making budgeted incomes and expenses.
Additionally cash budget helps in making various decisions regarding the management of working capital in the budgeted period. Some of them are,
- The cash budget is helpful in determining whether the organization needs bank overdraft or working capital loan or not in the budgeted period. If the resulted cash after making cash budget shows negative balance or insufficient balance then the organization will plan regarding the bank overdraft or working capital loan. In this way, this budget determines the need of bank overdraft or working capital loan (Weygandt, Kimmel, & Kieso, 2009).
- Cash budget will also helpful in making investing decisions. If the organization will have sufficient cash after making all relevant cash outflows then the organization can make a decision regarding the future cash investments otherwise not.
- It also helpful in making financial decisions regarding the cash dividend etc.
Hence it can be concluded that cash budget performs a significant role in making working capital as well as investing and financial decisions in the budgeted period.
Inventory management refers to the decision regarding the keeping of inventory in the hands of the organization at any point of time in the financial period. Inventory management starts with making a decision regarding the inventory levels. It may contain reorder level, opening, and closing stocks, holding inventory etc. One requires keeping in mind holding cost and ordering cost in making decisions regarding the inventory levels and order sizes. Inventory is a most significant asset for manufacturing and merchandising organizations because they earn their revenue i.e. main source of income through the sale of inventory. Inventory management is done by the management because it directly impacts the profitability of the organization. Inventory management is also important for decision making aspects.
Moreover, Inventory management is helpful in reduction of cost of goods sold by reduction of holding and ordering cost and increase in sale by the absence of stock out. Inefficient inventory management results in stock outs and reduced revenues. Inventory management is helpful in making decisions regarding the expected purchases, most favorable supplier, warehousing expenses, required storage space and cost related to that space, capacity level at which organization needs to perform and stock levels (Barwa, 2015). This decision making impacts operating expenses of the organization and in urn direly impact the income of the organization.
In this way it can also concluded that inventory management performs a significant role in making working capital related decisions and influencing operating profits of the organization.
Barwa, T. M. (2015). Inventory Control as an Effective Decision-Making Model and Implementations for Company’s Growth. International Journal of Economics, Finance and Management Sciences , 3 (5), 465-472.
Cash management. (2015). Retrieved October 11, 2017, from https://library.vcc.cc: https://library.vcc.ca/learningcentre/pdf/vcclc/HOSP2110-12-cashmanagement.pdf
Weygandt, J., Kimmel, P., & Kieso, D. (2009). Managerial accounting: Tools for business decision making. John Wiley & Sons.