What is the main function of a cash-flow budget?

The main function of a cash-flow budget is to forecast the timing and amount of cash flows required for a specific period, typically a year. This type of budget plays a crucial role in financial planning as it helps organizations understand when cash will come in and when it will go out. By projecting cash inflows and outflows, entities can ensure they have sufficient liquidity to meet their obligations, manage cash surpluses efficiently, or arrange for short-term financing as needed.

Understanding cash flow is essential for maintaining financial stability, as it allows organizations to identify potential shortfalls in cash as well as timing mismatches between cash inflows and outflows. A cash-flow budget is a proactive approach to avoid cash shortages, which can hinder operational capabilities and lead to financial difficulties. This foresight empowers management to make informed decisions regarding spending, investment, and cash management.

The other choices focus on different aspects of financial management but do not align with the primary purpose of a cash-flow budget, which is specifically about forecasting cash movement rather than overall financial health, employee compensation, or performance variances.