What is a cash budget and why is it essential for liquidity management?

• A. A cash budget forecasts cash inflows and outflows to ensure liquidity and plan financing needs.
• B. A cash budget tracks only long-term capital expenditures.
• C. A cash budget is the same as an income statement.
• D. A cash budget forecasts only inflows, not outflows.

Answer: (A)

Cash budgets focus on how much cash the business will have in the near term by forecasting both cash receipts (inflows) and cash payments (outflows) for a specific horizon. Starting with the current cash balance, they project ending cash each period, highlighting when cash will be tight or when there is excess. This is crucial for liquidity management because it makes timing gaps visible ahead of time, so management can arrange financing, schedule debt repayments, or adjust expenditures before a shortfall occurs. It also helps ensure the organization can meet obligations like payroll and supplier payments without scrambling for emergency funding. Unlike the income statement, which shows profitability without regard to when cash actually moves, a cash budget centers on cash timing and short-term movements, not just long-term or asset-focused spending.