The numbers in a cash budget are often taken for precision. A great deal of faith is usually put on them. A moments reflection, however, would reveal that the figures found in the cash budget merely represent estimates of future cash flows. The actual cash flows are likely to deviate from the estimates provided in the cash budget - the extent of deviation depends mainly on how volatile are the cash flows of the business.

The liquid resources of a firm may be kept in various forms: cash balance in current account, reserve drawing power under cash credit or overdraft arrangement. No faxing fast cash in current account provides the highest degree of liquidity. However, the interest earned on current account balance is nil. Hence it is costly to keep cash balance in current account. Yet, no firm can conceivably do without some balance in its current account. Indeed, some firms carry large cash balances in current accounts.

Reserve drawing power under cash credit or overdraft arrangements may appear to be an economical way of maintaining liquidity. The firm is not required to pay any interest on the unutilized portions of the cash credit or overdraft limits, yet it has a ready access to the undrawn amounts. However, there is a catch. If a part of the cash credit or overdraft limit, kept in reserve to meet contingencies, remains unutilized over a prolonged period of time, the bankers may reduce the cash credit or overdraft limit.

This seems to be the reason why some firms draw fully on these limits, for some periods of time at least, even if it means keeping the funds virtually idle in their current accounts. Depositing money with other companies, on a short-term basis, is fairly attractive in terms of rate of return. Typically, these deposits are made for a period of 2 to 6 months, often with a right to recall at a months notice.