Question

Discuss the differences between a cash budget and an operating budget. Why might both be important to a small business?

Answer 1

Operating a business requires proper attention to its finances. Controlling expenses and balancing them against income is accomplished through the budgeting process. Businesses primarily use the cash budget or the operating budget format. Preparing a budget is necessary if a company's expansion is reliant upon financing. Banks and other lending institutions determine a business’ bottom line through investigation of its cash or operating budget. A well-prepared, accurate budget assessment of the business’ success provides the basis for future expansion plans.

A cash budget is very important, especially for smaller companies. It allows a company to establish the amount of credit that it can extend to customers without having problems with liquidity. A cash budget helps avoid a shortage of cash during periods in which a companyencounters a high number ofexpenses.