In previous article of what is cash management? We know to why is important of cash management in an organization. Now, We know that basic strategy of cash management.
Cash flow forecast is crucial in cash management. Thus, the efficiency of cash management is directly related to the ability to accurately forecast cash flows.
Basic strategy of Cash Management
The following requisites are essential for effective budgetary control system in basic strategy of cash management.
Determination of the objectives
There should be clear perspective of the objectives to be achieved through the budgetary control system. In most of the cases, the basic objective is to achieve desired/increased profits.
To achieve, the following problems are to be sorted out and the steps needed to follow to achieve the below are explained further here:
- Laying down the plan for implementation to achieve the objectives.
- Bringing co-ordination amongst the different departments.
- Controlling each function so as to bring the best possible results.
Proper Delegation of Authority and Responsibility
The first step is to have clear organization chart explaining and responsibility of each individual executive. There should be no uncertainty regarding the point when the jurisdiction of one authority ends and that of another begins.
Proper Communication System
The flow if information should be quick so that the budgets are implemented. Two way communications is important. What is required to be achieved and how it is to be achieved should reach the lowest level.
Similarly, upward communication in respect of implementation difficulties should reach the top level to sort out, without loss of time.
Participation of All Employees
Budget preparation and control are done at the top level. However, involvement of all persons, including at the lower level, is necessary in framing the budget and its implementation for the success of budgetary control.
In practice, budgets are executed at lower level. With experience, they can offer practical suggestions that can lead to success. The success depends more on the active participation of all employees of the organization.
Flexibility
Future is uncertain, despite the best planning and foresight, still there may be occurrences that may require adjustments. Budgets should work in the changed circumstances. Flexibility in budgets is required to make them work under changed circumstances.
Motivation
Budgets are executed by human beings. There should be incentive in achieving the required targets. All persons should be motivated to improve their working in achieve the goals set in the budgets.
Process of Cash management
In order to have effective budgetary control system, it is appropriate to take the following steps:
Budget Manual
This is a written document specifying the objectives and procedures of budgetary control. It spells out the duties and responsibilities of executives. The budget manual defines the sanctioning powers of the various authorities.
Budget Centers
A budget centre is that part of organization for which the budget is prepared. Budget centre can be a department, section of a department or any other part of department. Budget centers are necessary for the purpose of ascertaining cost, performance and its control.
Budget committee
In a large concern, all the functional heads are the members of the budget committee. They discuss their respective budgets and finalise the budget, after collective decisions. The committee is responsible for its execution and achievement of the goals set.
Budget officer
The chief executive appoints some persons as the budget officer. He is conversant with the functioning of the various departments. All budgets are presented to him who places before the budget committee, after making the necessary changes, for its approval.
Budget period
A budget period is the length of the period for which budget is prepared. Normally, budgets like purchases and sales budgets are prepared for one year. However, a capital expenditure budget is prepared for a longer period i.e., 3 to 5 years.
Determination of key factor
Budgets are prepared for all the functional areas such as production, sales, purchases, finance, human resources and research and development. These activities are inter-connected and inter-dependent and so the budgets are.
The influence of key factor may neither be permanent nor the same factor may be constant. The management would be constantly endevouring to remove the problems associated with key factor for better performance.
Conclusion
At last words, we say that cash management also most important factor in prepare an ideal budget. Budget maker officers never ignore this and always should be remembering of process and basic strategy of cash management.
