Actions to Avoid Cash Shortage for Cash Budget

The cash budgets shows the pattern of future cash flows giving information on cash surpluses, which can be used, or deficits, which have to be funded. Management could take following actions depending on the cash positions shown in a cash budget.

Cash Position Appropriate Management Action

Short term surplus

  • Pay trade payables early to obtain discount
  • Purchases of goods in bulk to avail trade discounts
  • Attempt to increase sales by extending credit to trade receivables
  • Make investments on short term basis

Short term deficits

  • Renegotiate overdraft limit
  • Give incentives to customers to purchase for cash
  • Offer cash discounts to trade receivables for immediate payments
  • Negotiate longer credit from suppliers if possible

Long term surplus

  • Make investments on long term basis
  • Expand level of operations
  • Replace or improve non-current assets
  • Redemption of preference share or debentures

Long term deficit

  • Issue of shares or injection of new capital by owner
  • Arrange long term loan from bank
  • Issue of debentures
  • Sale of surplus non-current assets
  • Consider shut down or disinvestment opportunities