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Cash flow continues to be a major problem of many firms in a variety of industries. It has been suggested that cash continues to be the major factor in determining whether or not an operation can exist over time (Clarke 1990).
The cash budget is an important tool in managing the resources of any firm. Without a cash plan, difficulties with cash flow may arise unexpectedly, and a firm's creditworthiness may be jeopardized. Thus, the forecasting of cash inflow and outflow should be an integral part of the routine budgeting process. Cash budgets that are prepared in accordance with the Financial Accounting Standards Board 95 format, direct method, are extremely useful in that receipts and expenditures are presented according to operating, investing, and financing activities.
Owners and managers of real estate properties can benefit greatly from the cash-budgeting process. A cash budget may be prepared for each property which lists all appropriate sources and uses of cash within the three categories of activities suggested by FASB 95. A relatively short time frame tends to work best, with monthly budgets being popular and usually adequate for monitoring cash flow.
The twelve monthly budgets for a particular property may be combined to produce quarterly or annual forecasts. Likewise, budgets for individual properties may be combined on a monthly, quarterly, or annual basis to produce aggregate information for all investments. Cash surpluses and deficiencies may be anticipated for individual properties and for the entire operation.
The cash budgeting process forces property managers to plan ahead, as opposed to reacting to difficulties when they appear. Potential problems may be identified before they surface, with plans developed in advance for dealing with such occurrences.
Another major benefit of projecting cash flow is that a forecast may be used at the conclusion of a budget period to evaluate performance. Actual cash receipts and expenditures may be compared to the original forecast so that variances...