What is the purpose of planning a cash budget?

The correct answer is Option (1) → To maintain adequate cash balance for various purposes and to avoid excess balance of cash.

• Option (1) To maintain adequate cash balance for various purposes and to avoid excess balance of cash. — Correct. A cash budget sets out the cash the firm expects to receive and to pay in each period. It shows in advance when the firm will run short of cash and when it will hold more than it needs. The firm can then keep enough cash for wages, purchases and other payments, without leaving money unused. Both halves matter. Holding too much cash is as much a failure as holding too little.

• Option (2) To forecast sales data — Incorrect. Estimating how much the firm will sell, and for how much, is the work of the sales budget. It is prepared first, and the cash budget is built on it.

• Option (3) To make investments in market: Long term and short term — Incorrect. Choosing where to invest is the investment decision of financial management. A cash budget only shows the surplus that could be invested.

• Option (4) To maintain adequate workforce in a company ensuring all activities are done in timely manner — Incorrect. Planning how many workers are needed is the work of the manpower budget and of the staffing function.