One of the principal methods of forecasting the financial needs of a business is the cash budget, which predicts the combined effects of planned operations on the firm’s cash flow. A positive net cash flow means that the firm will have surplus funds to invest. But if the cash budget indicates that an increase in the volume of operations will lead to a negative cash flow, additional financing will be required. The cash budget thus indicates the amount of funds that will be needed or available month by month or even week by week.
A firm may have excess cash for a number of reasons. There are likely to be seasonal or cyclic fluctuations in business. Resources may be deliberately accumulated as a protection against a number of contingencies. Since it is wasteful to allow large amounts of cash to remain idle, the financial manager will try to find short-term investments for sums that will be needed later. Short-term government or business securities can be selected and balanced in such a way that the financial manager obtains the maturities and risks appropriate to a firm’s financial situation.
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