What is the primary purpose of a cash budget?

The primary purpose of a cash budget is to outline projected cash inflows and outflows. This financial tool provides a detailed estimate of an organization's expected cash receipts and payments over a specific period, typically broken down on a monthly basis. By forecasting cash flow, businesses can ensure that they have enough liquidity to meet upcoming obligations, avoid cash shortages, and strategically plan for investments or savings.

A cash budget helps management make informed decisions regarding cash management. It identifies periods when cash surplus may occur, allowing for opportunities to invest excess cash, and highlights times when cash deficits may arise, prompting management to arrange for financing or defer expenses.

While determining potential future profits, calculating operational costs, and assessing departmental spending are important aspects of overall financial management, these activities do not specifically focus on the flow of cash, which is the unique and essential aspect of a cash budget.