In financial management, what is a cash budget and why is it prepared by a business to plan its future cash inflows and cash outflows over a specific period?

Introduction / Context:
In financial management and accounting, a cash budget is one of the most important short term planning tools. It helps managers estimate when cash will come into the business and when it will go out, so that the firm can avoid cash shortages and make better investment decisions. Interview and exam questions often test whether a candidate can clearly define a cash budget and differentiate it from other types of budgets and financial statements.

Given Data / Assumptions:

• The question refers to cash budget within the context of business finance and accounting.
• We assume a normal business that receives cash from customers and pays cash to suppliers, employees and lenders.
• The budget covers a defined future period such as a month, quarter or year.
• The focus is on cash flows, not on total profit or non cash items like depreciation.

Concept / Approach:
A cash budget is a forward looking statement that estimates cash receipts and cash payments. It is different from an income statement, which focuses on revenues and expenses, and from a balance sheet, which shows assets and liabilities at a point in time. The key idea is to plan cash so that the firm has enough liquidity to meet obligations and can decide whether it needs to borrow or can invest surplus cash. To answer the question, we choose the option that captures this definition and purpose most accurately.

Step-by-Step Solution:
Step 1: Identify that the question asks for the meaning of cash budget in financial management. Step 2: Recall that a cash budget is a schedule of expected cash inflows and cash outflows for a period. Step 3: Compare option A, which mentions detailed forecast of cash inflows and cash outflows for a defined future period. Step 4: Observe that option B describes a balance sheet, option C describes a capital expenditure budget, and option D describes a sales budget. Step 5: Conclude that only option A correctly states what a cash budget is and why it is prepared.

Verification / Alternative check:
As an additional check, think about the main benefit of preparing a cash budget. It allows management to see whether there will be a cash surplus or cash deficit in each period. If there is a deficit, the firm may arrange short term borrowing or delay payments. If there is a surplus, the firm may invest the excess cash. Only a forecast of cash inflows and cash outflows provides this information, which confirms that option A fits the standard textbook definition of a cash budget.

Why Other Options Are Wrong:
Option B is wrong because a statement that shows assets, liabilities and equity at year end is a balance sheet, not a cash budget. Option C is wrong because a capital expenditure budget deals with long term investment in fixed assets, not day to day cash flows. Option D is wrong because a schedule of expected sales units is a sales budget, which may be used to build a cash budget but is not itself a cash budget. None of these alternatives focus directly on planning cash inflows and cash outflows.

Common Pitfalls:
A common mistake is to confuse cash budget with profit budget or income statement. Profit can be positive while cash is tight, because customers may not have paid yet. Another pitfall is to think that cash budget is prepared only once a year, while in practice many firms prepare monthly or even weekly cash budgets. Candidates may also wrongly assume that any budget related to money is a cash budget, without checking whether it tracks actual cash movements. Being clear about the focus on cash receipts and cash payments helps avoid these errors.

Final Answer:
The cash budget is best described as a detailed forecast of expected cash inflows and cash outflows for a defined future period, which helps a business plan its liquidity and short term financing needs.