In cash budgeting, what is the purpose of a cash surplus/shortage forecast?

• A. To estimate long-term capital investments.
• B. To set dividend payout levels.
• C. To measure project profitability.
• D. To ensure liquidity and plan short-term financing.

Answer: (D)

Cash budgeting focuses on managing short-term liquidity. A cash surplus/shortage forecast projects when cash will be available and when it will be tight over the coming weeks or months. The main purpose is to ensure the business can meet its obligations on time and to plan how to cover any shortfalls through short-term financing, while also deciding how to use any excess cash if a surplus occurs. This is different from long-term capital investment decisions, which assess project returns; from project profitability, which looks at overall profitability of initiatives; and from dividend policy, which concerns profit distributions rather than day-to-day cash flow management. In practice, the forecast guides actions like borrowing, drawing on credit lines, or investing idle funds to keep operations smooth.