What is a common use of a cash budget?

• A. To identify the need for external financing
• B. To project total revenue for the year
• C. To determine optimal inventory levels
• D. To calculate depreciation expense

Answer: (A)

A cash budget focuses on the timing of cash inflows and outflows to ensure the business has enough liquidity to meet obligations. By forecasting when cash will be received and when it must be paid, it highlights any projected shortages, signaling when external financing might be needed to bridge gaps. This makes identifying the need for external financing the best use of a cash budget.

Other budgeting activities serve different purposes: projecting total revenue for the year comes from the sales or revenue forecast, not from cash timing. Determining optimal inventory levels relates to inventory management and production planning, where cash considerations matter but aren’t the primary focus. Depreciation expense is a non-cash accounting entry used for reporting and tax purposes, not for planning cash flows.