Importance of Cash Budget and Credit Policies in Decision Making

In making business decisions, managements of firms have to gain an understanding of the significant aspects of a cash budget and credit policies to maintain healthy working capital. First, all business operations depend on its cash budget. A cash budget is an estimate of all cash in and out of business over a specified period. A cash budget is considered in determining the expenses and the revenues of a firm. Cash budget depends on the production of goods, cash collection from sales, cash excess or deficiencies and cash balances ( Mungal & Garbharran, 2014 ). For example, if a business has a deficiency in its cash budget, then it implies that it has insufficient funds to run its operations and will be required to make decisions of taking debts or issuing stock to investors. When the cash balance is high, a company has an excellent working capital and may consider increasing production, inventory, salaries and expanding the business. 

Second, a company’s working capital is determined by its credit policies. Credit policy involves a set of guidelines to identify which clients can be given credits, their terms of payment, limits set for outstanding loans and steps used in dealing with delinquent accounts (Lucas, 2016). This process aims at increasing the company’s revenue and reducing the risks involved in giving credits (Lucas, 2016). In a business set up, when making decisions of considering extending loans to customers, the management should deliberate on the overall economy, size of the firm, industry to which is a part of and its cash flows. When the company gives credit, more customers can afford goods, and thus the sales go up. However, it may have adverse effects on the working capital when clients fail to pay their debts. In conclusion, the cash budget and credit policies are essential for the success or failure of any business. 

References 

Lucas, D. (2016). Credit policy as fiscal policy. Brookings Papers on Economic Activity , 2016 (1), 1-57. 

Mungal, A., & Garbharran, H. L. (2014). The perceptions of small businesses in the implementation of cash management techniques. Journal of economics and behavioral studies . 6 (1), 75-83.