As described by many authors “cash flow is the lifeblood of every business” (Williamson, 1999, p.57). The firms thereby need to take great care while handling the cash flow. For effective management of cash flow, the management should have a predetermined volume and time schedule of cash inflow as well as cash outflow. Therefore it is the responsibility of the finance department to analyze all the cash inflow as well as cash outflow beforehand. Budgeting is one of the most commonly used techniques that assist the company to understand the nature of cash flow and to take preventive actions as and when required.For effective financial management, the company needs to develop, execute and control its budget in the best possible way. In the below-given session an in-depth analysis has been conducted to understand the manner in which the budgeting technique can be effectively used for financial management.As described by an Anglo-Saxon “a budget may be considered to be a set of financial statements resulting from a particular scenario- generally the most likely or hoped for scenario” (Hinka, 2007, p.4). At first, the top-level manager sets the corporate goal that needs to be achieved in the future and this gets communicated to the different departments in the form of target. In each functional department, the respective managers set the budget that presents the level of activity to be conducted and the amount of cash required. Later on, these budgets are submitted to the administrative department for final approval. Often the administrative department asks the respective departments to make the requisite changes. Once the budgets of the entire functional department are approved by the administrative department it goes to the finance department where the master budget is formulated. The finance department also develops a cash budget to determine cash inflow and outflow at different points of time.
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