Final answer:
The cash budget predicts the effect on the cash position at given levels of operations, allowing companies to manage their liquidity by projecting cash inflows and outflows.
Step-by-step explanation:
The cash budget is a schedule of expected cash receipts and disbursements that predicts the effect on the cash position at given levels of operations. This financial tool is essential for a company to plan its cash flows and to ensure that it can meet its financial obligations when they come due. It involves projecting all of the company's cash inflows from its operations and other sources, as well as its outflows for expenses and other payments within a given period.
In practice, a cash budget helps businesses prevent liquidity issues, plan for capital expenditures, and assess the potential need for borrowing or investing surplus cash. It is usually prepared following a sales forecast, which is used to estimate future sales, but it may also factor in previous accounts receivable and current accounts payable to assess the timing and magnitude of cash flows.