Final answer:
The main reason for maintaining a minimum cash balance in a cash budget is to serve as a buffer that can address forecast errors, aiding in sustaining cash flow and avoiding insufficient funds. Option A
Step-by-step explanation:
The correct answer to the question regarding an important reason for imposing a minimum cash balance in the cash budget is A. it provides a cushion that can absorb forecast errors. Having a minimum cash balance acts as a safety net, allowing a business to tackle unforeseen circumstances such as discrepancies between projected revenue and actual income or unexpected expenses.
This practice is also essential for maintaining a healthy cash flow and avoiding penalties associated with overdrafts or having insufficient funds.
Budgeting, in essence, involves planning for both incoming and outgoing finances to manage the operations smoothly. A minimum cash balance is an integral part of this process, as it allows the company to be better prepared for variability in actual cash flows compared to the budgeted numbers.
Despite the other options provided, extra funds for managers to spend (Option B) or making the balance sheet look better (Option C) are not the primary financial reasons for mandating a minimum cash balance. Option A