Certification in Supplier Diversity Practice Exam

Which characteristic denotes a cash flow budget?

1. It focuses on future expansion

2. It is based solely on past expenses

3. It connects expenditures to the receipt of revenue

4. It prioritizes line items over total budget

The correct answer is: It connects expenditures to the receipt of revenue

A cash flow budget serves the essential purpose of monitoring and managing the inflow and outflow of cash within a business. The characteristic that best signifies this type of budget is its connection of expenditures to the receipt of revenue. A cash flow budget is designed to ensure that a company has enough cash on hand to meet its obligations as they arise, making it crucial to understand when cash is expected to be received and when expenses must be paid. This aspect is fundamental for maintaining liquidity, as it highlights the timing of cash transactions rather than just the amounts involved. Understanding the relationship between cash inflows (from revenue) and cash outflows (for expenses) allows businesses to anticipate any potential shortfalls and take necessary action well in advance. By doing so, a cash flow budget enables organizations to manage their operations effectively, avoid insolvency, and plan for future financial health.