An alternative method of projecting a firm’s future financial needs (s

An alternative method of projecting a firm’s future financial needs (such as bank loans ) involves creation of a pro forma cash budget.

Would you consider a cash budget to be more appropriate for short-term or long-term projections? Why? How do monthly cash budgets aid in the development of an annual cash budget? Is a cash budget more helpful for firms with seasonal needs or for those with constant cash flow needs?

ANSWER

A CASH BUDGET is a more direct cash flow forecast, because it’s based on the assumption that a firm is often currently borrowing money and will need to increase or decrease its loan amount in the coming year. A cash budget forecasts the timing and amount of cash inflows and outflows, and it is often created based on monthly cash flows. This type of budget is particularly useful for firms that face seasonal financing needs. Thus, a cash budget is often more valuable as a short-term rather than a long-term financial forecasting vehicle.