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b) Discuss why cash budgeting is particularly important for an expanding company like Roller, Ltd.
The difference between a company that succeeds and one that fails is often cash management.
Having too little cash means a business may have to pass on profitable ventures or take out loans
to overcome liquidity issues. Too little cash may also mean a company may be unable to operate at
normal levels or be forced to shut down completely. To avoid these issues, companies rely on a cash
budget to plan and control cash receipts and payments.
A cash budget is a way to determine if a company has the cash necessary to meet upcoming obligations
and to trigger corrective actions if a company’s actual figures don’t match the budget estimates.
For example, a company experiencing cash-flow problems may need to borrow money in the short term
for emergency equipment repairs, the payment of taxes or a monthly payroll. In addition, the company may
need to borrow money in the long term for the introduction of a new product to the market or the replacement
of equipment. The company might also need respond to a sharp decline in market sales by adjusting spending or
prices or negotiating more favorable terms with lenders.
A cash budget is used to illustrate a company’s financial position to internal and external stakeholders – individuals
with an interest in the company – including investors, suppliers and company leadership. For example, increasing
cash flow may indicate strong demand for the company’s products and opportunities for company expansion,
which are positive signals to current and potential investors. In contrast, if company expenses are significantly more
than the company’s cash inflow, the investment risk is high and may deter additional investment in the company.
Declining cash flow may also make it more difficult for a company to obtain additional vendor credit or pay its
existing debt, which might force the company into bankruptcy.