I. Cash Planning
A business needs cash for meeting its short and long term business needs. These include financingcurrent assets,fixed assetsor making payments for operating expenses.
Now, assets and liabilities are either current or non-current. And these classifications have a big impact on cash management.
A current asset represents cash, or an asset that gets converted into cash within 12 months. For instance,accounts receivableandinventoryare current assets. On the other hand, fixed assets such as machinery and equipment are non-current assets that will be used for years.
The most pressing cash management need for a business owner is to collect current assets in cash. This is because such cash is used to pay off the current liabilities. Therefore, planning your long-term cash needs is important. But you need to address any short-term cash problems now in order to keep your doors open.
So, there are times when a business generates sufficient profits but faces cash shortages on day to day basis. This is because earning profits does not translate to having sufficient cash for running the business. However, there are also times when the business has idle cash which impacts the earning potential of your business.
Thus, cash planning is essential. It helps business in determining futurecash flowsthereby reducing the chances of excess cash and cash deficit.
Hence, to undertake cash planning, business must prepare a cash budget.
