Do you do any cash budgeting each month to forecast and if s

Do you do any cash budgeting each month to forecast, and if so, do you have a shortfall or a surfeit? Should they end up with more cash than they need, even just $100, what will they do with it?

Just as many severe diseases may be diagnosed from telltale symptoms, short-term financial distress may also be predicted from warning signs, such as when management is more concerned with survival than with actual managing. Can students come up with any other examples of warning signs of short-term financial distress?

Solution

Cash Budgeting is nothing but estimating the cash inflows and outflows for a particular period of time and ensuring that adequate cash balance is maintained for carrying out all operations smoothly. Businesses do cash budgeting to ensure that enough liquidity is maintained to meet cash requirements. Cash should be maintained to the extent it is required, excess cash is not quite favourable as it is not invested in the business and not contributing to earn operating profits. Excess cost is seen to have an opportunity cost. If a company has extra cash of say even $ 100, then it can invest it in short term instruments or keep it in bank.

The warning signs of short term financial distress includes negative cash flow (i.e when cash payments are more than cash inflows), default in payment of interest or repayment of loan, declining working capital, etc. These are indicators that company is struggling to generate adequate cash inflows to pay the cash expenses and it has implications on creditworthiness of the business. The solvency ratios become adverse and company might try to infuse more funds into the business.