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How is the cash requirement estimated?
The best tool available with the company to estimate the cash requirement is Cash Budget. It is a statement showing the various sources of cash receipts and various applications of cash. Thus, by preparing cash budget the company can get a glance over the excess or shortage of cash. If shortage of cash is estimated then the company has to arrange for it from other sources. On the other hand if excess of cash is estimated then the company can explore more investment opportunities. The cash budget is prepared while keeping few points in mind and these are:
- Cash budget period should be selected very carefully. As the period covered by the cash budget should neither be too long nor too short.
- The items appearing in the cash budget should be carefully decided.
- Various items appeared in the cash budget should be classified under two categories : Operating cash flows and Non operating cash flows.
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