Why do companies have cash? Cash is a notoriously low-yielding asset. The return on cash in my bank account is less than 1%. So companies don’t need to have a lot of low-yielding cash, but they need to have enough cash to cover their daily needs. Bills, staff salaries, rent and insurance all need to be paid in cash. Companies must manage cash and make sure it is available when they need it. If paychecks are due on Friday and you don’t have the cash, then the whole operation is thrown into chaos. In general, companies need to manage cash carefully. As an example of the need for cash management, this chart shows how the quarterly cash balance of Toys R Us, a toy retailer, fluctuates. They closed their U.S. stores in 2018, but still operate more than 800 stores outside the United States. As you can see from this cash balance chart, Toys “R” Us always has the lowest cash balance in October and the highest at the end of January. Why? If we stop to think about it, Toys “R” Us’ peak sales season is during the holiday season in November and December. So how can Toys “R” Us ensure it has enough cash to spend in October? And put the extra cash to good use in January? One cash management tool is the cash budget. We can use it to carefully plan and solve cash flow problems ahead of time. From experience, we can predict when to collect cash from customers and when to pay cash to suppliers. We can predict in advance when we need to borrow cash. Toys R Us, for example, knew they needed cash in October. It’s best to know this in advance in order to go to the bank and get a pre-approved line of credit. You can tell the bank that you are short of funds, but your cash budget shows that you expect to collect enough cash in the future to be able to repay the loan. The only way to know your cash needs ahead of time is to set a cash budget. With a solid cash budget, you can go to your bank ahead of time for details on short-term loans