What Do You Know About Financial Budget?

A financial budget summarizes the organization's sources and uses of cash for the coming period. Sources of cash can include revenues, newly issued stock, loans, or the sale of company assets. Cash is used to pay operating expenses, purchase new assets, pay off loans, issue dividends to shareholders, or supplement retained earnings. For example, Chrysler was faced with a $2 billion negative cash flow for its auto operations at the end of fiscal year 1990. To boost its cash, Chrysler furiously slashed operating costs, halved the March 1991 quarterly dividend, and renegotiated loan terms.

A cash budget, or cash-flow budget, projects the detailed sources and uses of cash for a specific period, such as daily, weekly, monthly, or yearly. The main goal of the cash budget is to detail a plan for having enough cash on hand to cover an organization's cash obligations for a specific day, week, month, or year. Since Chrysler was in a cash-poor situation, the cash budget provided a framework for managers to discuss how to free up more cash for coming periods.

A capital expenditures budget is a plan for the purchase of large assets, including buildings, land, and machinery. Because major expenditures often require loans 9 which of course involve interest and principal payments), the capital expenditures budget is assessing how a planned capital expenditure will affect cash flow in current and in future years.