Managing Company Cash: Determine a Cash Budget

Tracking the use of a company’s cash is important. Most every company provides some form of petty cash to have on hand for minor business expenses. Not only is the accountant responsible to record cash flow but he must also assess the amount of any excess cash to be invested in order to maximize the asset’s return to the company.

Cash is the most liquid asset a company has in its possession. Investments of excess cash in short-term investments earn interest. In larger companies, cash management may fall under the treasurer’s function. However, the accountant must provide the necessary information so the treasurer can correctly perform his job.

Determining a Cash Budget

A treasurer will use the cash budget determined by the accountant. A cash budget is necessary to establish the appropriate amount of cash to have on hand. This includes petty cash which is the small amount of cash available for small purchases by employees or for giving change to customers.

In regards to the company’s long-term financial goals, the cash budget also sets a cash level to help conclude if there is excess cash to be re-invested. Excess cash should then be invested in short-term investments.

    • Cash Equivalents: Investments in securities maturing within 90 days. It is advisable that these securities have a low risk of loss of value. This includes money market accounts, government bonds, Treasury bills, and commercial paper.
    • Short-term Investments: Investments in securities maturing in excess of 90 days but within one year.

These cash investments can be converted to cash immediately so they are reported at face value in the Current Asset section of the balance sheet. It is not necessary to list the individual types of cash equivalents. If desired, further explanation can be provided in a footnote.