What is a cash budget, and how can this statement be used to help reduce the amount of cash that a firm needs to carry? What are the advantages and disadvantages of daily over monthly cash budgets, and how might a cash budget be used when a firm is negotiating a loan from its bank?
A is a typically month long table that illustrates cash receipts, disbursements and balances. The cash budget can help a firm understand if it has a cash surplus, which could motivate the firm to reduce its cash on hand by investing in new projects. A daily cash budget is useful for describing the day-to-day cash flows of a firm, and gives a good idea of how payments should be scheduled. A monthly cash budget is better for the big picture, demonstrating how much cash a firm would have at the end of each month if it didn't borrow or invest any cash.
Cash budgets are used when negotiating a loan from a bank because the budgets give a good idea of how much the firm will need, when the funds will be needed and finally how long it will take to repay the loan. Lenders want to familiarize themselves with most aspects of a cash budget before they can feel confident about approving a loan to a firm.
Recommended textbook solutions
A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows:
a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b. Assuming the projects are independent, which one(s) would you recommend? c. If the projects are mutually exclusive, which would you recommend? d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?