Question

Is cash planning essential to a firm's success? If so, how can such planning benefit a firm's bottom line?

Answer 1

Yes cash planning plays an integral role in ensuring the success of the business organisation. Cash planning solves a lot of problems of the business and also prevents complexities from taking domination in the business. Cash planning plays the following essential functions to enable a business firm to succeed:

1) Cash planning ensures that all the expenditures of the business for a particular period of time are financed in a smooth manner without any hurdles or disruptions that might hamper the smooth functioning of operations.

2) Cash planning ensures a good liquidity position is maintained by the business so as not to run out of money during a crucial period or a necessity. Thus a good liquidity position will ensure that business is carrying out its routine activities efficiently and making timely payments due to the creditors.

3) Cash Planning ensures that no such situation of cash deficit or cash surplus arises in the firm. As cash planning will prevent cash deficit which in turn saves the firm from the borrowing cost. And on other hand cash planning also saves the firm from cash surplus which could have resulted in the idle cash. Thus cash planning will save firm from the opportunity cost of idle cash which could be otherwise used for many other purposes.

4) Cash planning enables the organisation to act as per the cash budget prepared by the organisation and not to exceed it. Thus saving the excessive use of cash.

5) Cash planning also reflects on the sources from which the cash is obtained and the sources to which the cash is spent.

Cash planning will provide the bottom line with clear targets and standards which will be a guiding criteria for the bottom line to comply and to attain. These targets will ensure that bottom line to take effective decisions that will ensure acting as per the standards laid down. Cash planning will provide them with a demarcation to manage the cash flow of the business. It will show them the efficient pattern of taking in and paying out the money from and within the firm to lead the business towards effective cash management. It will provide them an idea about the estimated expenses and incomes of firm during a particular period of time so as to ensure meet these expenses and accordingly expect those incomes. It will provide the bottom line with the insights about the short term financial position of business and thus how to carry out the routine operations of business to adjust to this financial condition without letting it put any impact on the business and its activities. It will help make necessary provisions in advance to cope up with the shortages of funds or unproductive use of fund by bottom line employees.

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