Cash Budget and Target Cash Balance the Essay

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Cash budget and target cash balance

The target cash balance is defined as the ideal cash amount a company intends to hold in its reserve at a given time. This figure seeks to strike a balance between the balance sheet costs of extremely little and too much cash. While a company with surplus cash at hand may misuse on investment opportunities, a company with poor cash will often be forced to make undesirable transactions to create more operating capital (Besley & Brigham, 2011). Individual investors are advised to set their target balance too. They may estimate at least the percentage of their holdings in cash to avoid such pitfalls.

Cash budget refers to the operating budgets and capital expenditures. It begins with the initial cash balances then cash inflows are added to the available cash. Cash outflows will then be subtracted to obtain the cash balance. If the cash balance falls below the company's intended balance, the financing segment will show the required borrowing. The financing segment covers debt payments among them interest payments. The financing activity adjusts the cash balance to obtain the ending cash balance (Ehrhardt & Brigham, 2009).

Compare and contrast the cash budget and long-term financial planning

Both long-term financial planning and cash budget focus on the financial health of an organization. While the cash budget process entails a routine review of annual expenditures, long-term financial planning involves an evaluation process identifying areas that require funding.

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Budgeting managers are given instructions on possible spending increases and limits while financial planning managers renew programs that produce material results (Brigham & Houston, 2012).

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Cash budget and target cash balance

The target cash balance is the optimal amount for a company to hold too much cash or too little cash by considering the tradeoffs between the costs of the two. It entails the tradeoff between the cost opportunities of holding excess cash and holding little cash (Ehrhardt & Brigham, 2009). If a company attempts to keep its cash held too low, it may find itself selling marketable securities unlike if the balance was higher. Therefore, trading costs tend to decline as the cash balance increases. Cash budget refers to the allocation of cash to various financial situations (Besley & Brigham, 2011). A company may have a cash budget for the amount of cash in its possession. Mostly, cash budgets are used to estimate if a company has an adequate amount of cash to expedite their regular operations. It may be used to establish whether excess of a firm's money is being spent in unproductive ways. While structuring a cash budget, a company summarizes the anticipated revenues, sales, operating expenditures, settlement of debts and purchase of assets (Brigham & Houston, 2012).

Compare and contrast the cash budget and long-term financial planning

While both cash budget and long-term financial planning….....

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