cash budget assignment

How to Prepare a Cash Budget? Step by Step Guides

In this article, we will cover how to prepare a cash budget. Typically, cash plays a critical part in every business. Having enough cash enables a business to optimize its operation; especially it helps in the investing activities. In order to help for a business to manage its cash for both investing and financing activities, a proper cash budget is needed. So how to prepare a cash budget?

What is a Cash Budget?

The cash budget is typically prepared to cover a short-period of time; usually within one year period with a breakdown to monthly or quarterly basis. The more frequencies of cash budget internal depends on how seasonal the business is. The more seasonal or uncertain position of a business leads to a more frequent the cash budget is prepared.

Purpose of Cash Budget

The primary purpose in preparing a cash budget is to know the cash position at the end of each month or quarter. This is because the company can decide on any financing needed if there is shortage of cash and decide on investment opportunities when the company has surplus cash.

Alternatively, if the company have surplus or plenty of cash, the company can consider investing in any short-term marketable securities; for instance, overnight repurchase agreement or short-term negotiable certificate of deposit (CDs).

How to Prepare a Cash Budget?

Step 1 – prepare the cash receipt projection.

ABC Co is preparing its cash budget for the last quarter of the year from October to December 20X9. ABC Co’s actual sales for August and September 20X9 are $150,000 and $350,000 respectively. The company has projected its sales for October, November and December for $300,000, $400,000 and $450,000 respectively.

Lagged 2 month: This represents the collections of accounts receivable previous 2 months. $30 represents the collections 20% of $150,000 sales of August while the collection of $70,000 represents the collections of $350,000 sales of September and so on.

Step 2 – Prepare the Cash Disbursement Projection

Following the cash receipts projection, let’s continue with the cash disbursements for ABC Co from October to December 20X9. From past history, ABC Co’s purchases represent 70% of sales. Historically, 20% of these is paid by cash, 60% is paid in the following month and the remaining 20% is paid in the second month of the purchases. Below are the other payments projected from October to December 20X9:

Wages and salaries: These amount came from the addition of fixed salary of $8,000 per month with the 10% of sales for each month. For instance, $38,000 in October came from (8,000 + 10%*300,000) and so on.

Step 3 – Incorporate the Cash Receipts and Cash Disbursements Projections

Limitation of cash budget.

When preparing the cash budget and in case of financing need, manager would estimate cost of financing facility to factor in the cash budget. Typically, lower interest would be considered and accounted for in the cash budget from one bank. However, they fail to account for other non-financial factors such as better customer experience or many other benefit of entering into financing arrangement with other banks.

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Cash Budget

Published on :

21 Aug, 2024

Blog Author :

Wallstreetmojo Team

Edited by :

Ankush Jain

Reviewed by :

Dheeraj Vaidya

What is Cash Budget?

Cash Budget refers to the estimation of cash inflows and outflows made by the management of the business entity over a given period where such estimations are made to evaluate whether the business has adequate cash & cash equivalents to meet its operating needs in the near future.

Accountants frequently refer to the cash budget statement to find the financial health of the organization. It shows a clear picture of the cash flow of the organization and how much funds are readily available to use without affecting the regular happenings of the business. A positive cash budget indicates surplus cash and a negative statement indicates otherwise.

Table of contents

Cash budget explained, how to prepare, recommended articles.

A cash budget is the written financial plan made by the business related to their cash receipts and payments in a given period. Cash receipts include receipts from the sale of goods & services, interest, etc. and cash payments include payment against the purchase of goods & services, salaries, electricity, loans, etc. In other words, the budget is prepared to make estimations of the company’s cash position in the future.

Generally, it is prepared by the business entities for one year, but when cash flows are not stable, then the companies go for preparing the cash budgets quarterly, monthly, or even weekly so that the business can manage their cash flows as per the requirement.

Let us understand the intent behind using a cash budget system in the daily operations of an organization through the discussion below.

• The primary objective of the cash budget is to see the future cash position of the business so that the management can evaluate when the funds are required to be arranged in the future so that the operations of the business will not be hampered.
• It is also prepared to check if the excess cash is available, then they must be invested in a productive way to maximize the business returns.
• Further, they are prepared to predict the cash surplus/deficit during the given period.
• To minimize the expenditures of the business by controlling the spending of the company.

The following methods are used to prepare a cash budget statement :

#1 - Receipts and Payment Method

Receipts and payment method is the most popular and easy method of preparation of the cash budget mostly short-term budget. In the receipts and payment method, all the estimated receipts are added to the opening cash balance. Then all the estimated cash payments are deducted from the sum of opening cash balance, and the estimated receipts and the remaining balance after the above calculations are made represent the closing cash balance.

#2 - Adjusted Profit & Loss Method

This method is followed for the preparation of a long-term cash budget. The basis of preparation under this method is the profit & loss account . The assumption under this method is that all the increase and decrease in cash balance is the profit/loss of the business.

Now while preparing a profit & loss account, various expenses such as depreciation, loss on the sale of assets, goodwill are written off, etc. that do not involve actual cash payments are deducted from the income of the business. Various incomes such as profit on the sale of the fixed asset are added to the income that does not include actual cash receipts are added to calculate the net profit of the business.

So while preparing a cash budget under this method, all the non-cash expenses are added to the net profit, and all the non-cash incomes are subtracted from the same. After that, the working capital changes, capital receipts, and payments, and cash flows related to financing are adjusted, and the opening cash balance is added to the amount after adjustment, and then the result is the cash balance.

#3 - Balance Sheet Method

In the balance sheet method of a cash budget, the expected balance sheet is prepared, which will include expected assets and liabilities except for the balance of cash & cash equivalents . Now if the total of estimated liabilities is more than the estimated assets, then the balancing figure is closing cash and cash equivalents.

But if the result is the opposite, then the closing balance is termed as an overdraft.

Let us understand the cash budget system better with the help of a couple of examples.

Elvis runs a supermarket in New Jersey. His payment schedule is quite hectic as various suppliers deliver various products to suffice the requirements of Elvis’ store. Therefore, upon receiving advice from one of the suppliers, he started implementing a cash budget statement.

In the coming week, the payments were on time as a clearer picture was painted through the statement and plans were made accordingly to ensure timely payments.

For business organizations, especially small businesses, it is important to maintain cash budgets as it gives the owners and employees a sense of what they are collectively working towards.

Small businesses are most vulnerable to inflation and its effects. Budgeting helps them tackle inflation and other business risks with more efficiency.

However, when the business grows out of the nascent stages, it might be difficult to maintain the cash budget by the owners as they might want to concentrate on the developmental aspects of the business. Therefore, it is advised to train employees to create, maintain, and review budgets.

A format to understand what we have understood so far shall help us understand the concept in better detail. Let us take a look at a cash budget statement format as given below.

Adopting a cash budget system provides ample insight into the financial well-being of the organization. A few other factors that make these budgets an important facet of businesses are discussed below.

• They help the management to know/estimate the cash position of the business well in advance relating to the different financial periods.
• The cash budget indicates the requirements of cash for capital investments.
• It helps the owners to know the surplus cash that will be available for the short term or long term investments.
• The future cash availability of the business can be known for availing discounts from the vendors on timely payment of cash.
• Planning of redemption of shares/debentures becomes easy with the estimation of cash position as the cash availability is known well in advance.
• It is also essential to maintain the liquidity of the business. It suggests the minimum level of cash that a business should maintain to meet the expected requirements and contingencies.

This article has been a guide to what is a Cash Budget. Here we explain its format, examples, and how to prepare along with its importance and purpose. You may learn more about financing from the following articles –

• Strategic Budgeting
• Participative Budgeting
• Static Budget
• Operating Budget

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How to Build a Small Business Cash Budget

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Our Small Business Expert

I keep a framed Coco Chanel quote on my desk. It reads, “The best things in life are free. The second best are very, very expensive.” Running a small business falls squarely in the latter category, most of us can agree.

Cash is the lifeblood of any small business, so it’s critical to monitor your company’s cash position and predict how it’ll change in the near future.

Overview: What is a cash budget?

A cash budget, also called a combined cash budget, is a financial planning tool that predicts when cash will come into and leave your business, usually on a monthly or quarterly basis.

The budget highlights areas where your business might not have enough money to cover essential payments, such as employee wages, debt payments, and emergencies. It can also identify times when you might have too much cash, a good problem to have.

All cash budgets follow the same formula:

Opening Cash Balance + Cash Inflow - Cash Outflow = Closing Cash Balance

Tracking your company’s near future cash position can keep your business from temporarily running out of cash. For example, a cash budget can flag a potential cash shortfall months away that you can remedy now by securing a line of credit. You can’t get approved for a loan overnight, so planning can buy your business longevity.

Cash budgets reflect the collections and payments based on your company’s master budget, a high-level expectation of future revenue and expenses.

Example of a cash budget

A cash budget is an income statement, bank statement, and cash flow statement all in one.

Take a gander at the six-month cash budget example below. It starts by giving the projected opening cash balance, which is the same as the previous month’s closing cash balance.

In between, there’s space for every type of cash collection, such as cash sales and customer payments on credit sales, and cash payments for expenses and loan payments. I took a flexible budget approach, estimating shipping costs as a percentage of the company’s cash sales for the month.

The cash budget ends with a cash deficiency or surplus based on the company’s target cash balance, the minimum amount of money the company is willing to have at the end of the month.

Cash budgets look like forward-looking income statements, cash flow statements, and bank statements melded into one. Image source: Author

The company predicts cash inflows -- to bring in more than it spends -- in February, March, and April. Cash is rolling in, and expenses are relatively low. Life is good.

However, they’re planning for net cash outflows in January, May, and June, where the company expects to spend more than it takes in. It shouldn’t be a problem in May, since the cash balance ends above the targeted $70,000. However, the company needs to consider how it will make do with thousands less than they would like to keep for emergencies in January and June.

How to prepare a cash budget for your business

Preparing a cash budget requires looking into the future. You’ll need your accounting software, most recent bank statement, and a crystal ball to get through all six steps.

1. Create a cash budget template

The best place to make a cash budget is in Microsoft Excel. A powerful tool for small business accounting, Excel gives you the reins to customize your cash budget. Copy the format above; I’ll be honored.

Some accounting software packages have budgeting features, so you can go that route if it’s available to you.

2. Determine the time frame

Think about how far out you’d like to project your company’s cash flow. A cash budget’s time horizon shouldn’t exceed one year; it’s unlikely you’ll be able to make a realistic projection that far in the future.

In this planning step, consider whether you’d like to estimate your cash ingoings and outgoings on a monthly or quarterly basis. You should only prepare a quarterly cash budget when your business has hoarded enough cash to cover expenses for the full quarter.

You might get even more specific than monthly, but that’d be more work than it’s worth. Businesses often have the leverage to delay cash payments within a 30-day period to avoid temporary cash shortfalls.

3. Identify a target cash balance

Just like individuals, businesses should have an emergency cash fund if times get tough. Safeguard at least three months’ expenses in cash, and promise yourself not to spend it unless you're in dire circumstances.

Solopreneurs with no employees can dual-purpose their personal emergency savings.

4. Enter your company’s current cash balance

Your business’s current cash balance might be the only certain number in the entire budget. Include your company’s current cash balance, including savings and petty cash.

Sole proprietors with no separate business bank account might not have a starting balance per se. Enter the amount you have set aside to fund future business expenses.

5. Prepare and analyze your business’s cash flow statement

To predict the future, look back at how your company’s cash flows. Open a month-by-month cash flow statement in your accounting software , and examine how your business spends and collects money.

The cash flow statement should also be the basis for all the categories on the cash budget. As shown in the example above, each collection or payment line represents a line on the cash flow statement.

6. Project your company’s cash flow

Here’s the most challenging part. Forecast your company’s cash flow by entering the business’s estimated cash collections and payments. Follow our guide to financial projections.

Start by estimating your company’s estimated cash receipts, also called cash inflows. Collections on accounts receivable, cash sales, and income interest are the most common cash inflows.

Next, estimate cash payments, or cash outflows. Consider operating expenses, such as rent and utilities, inventory purchases, and looming debt and tax payments. Manufacturers also incorporate expected raw material purchases outlined in their production budgets.

You should have a full-fledged cash budget by now. Have a colleague look it over to make sure you didn’t miss any loan or tax payments.

3 best practices when preparing a cash budget

Take these tips into account as you predict your business’s future cash position.

1. Take advantage of technology

Artificial intelligence (AI) is not here to take your bookkeeper’s job -- yet. However, AI accounting can help you develop your cash budget.

Accounting software such as Intuit QuickBooks Online and Xero automatically creates short-term cash flow projections based on your company’s recent spending patterns. Bank of America business accounts do the same.

While you might know more about upcoming debt and tax payments than your software, take a peek at what they’re expecting down the pike.

2. Compare budgeted vs. actual cash flow

Enhance future cash budgets’ precision by overlaying your actual and budgeted cash flow and analyzing the variances.

Comparing budgeted and actual numbers might reveal collection and payment patterns you hadn’t initially recognized. Your future cash budgets will be better for it.

3. Have a plan for cash surpluses and deficiencies

Devise a plan to secure cash to keep your business afloat during cash droughts.

Many small businesses establish revolving lines of credit, a type of loan, to smooth potential cash flow issues. When your business needs cash, it can pull on its credit line. When the debt is repaid, you’re immediately eligible to take out more money, up to your credit limit.

Likewise, too much cash in the bank means you might be missing an opportunity to invest in growing your business. Create a growth strategy to execute during prosperous times.

Budgets aren’t written in concrete

Cash budgets are an essential part of a small business’s financial planning. While expenses occasionally come out of nowhere and threaten to tank your business, having a cash budget can help you see around corners with enough time to react.

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Preparing a cash budget

Mitchell Franklin; Patty Graybeal; Dixon Cooper; and Amanda White

Why we need to prepare a cash budget

The financial budgets involves examining the expectations for financing the operations of the business and planning for the cash needs of the business. The budget helps estimate the source, amount, and timing of cash collection and cash payments as well as determine if and when additional financing is needed or debt can be paid.

We will focus on preparing the cash budget as shown in the master budget diagram below (preparing a capital expense budget and budgeted balance sheet is beyond the introductory scope of this text). It is critical for the business to understand how much cash is going to be received and why, as well as the size and timing of payments to suppliers and employees. Remember that trading while insolvent (that is, trading while unable to pay your debts) is against the law. For incorporated entities – Directors can face serious penalties if found to have been trading a business and incurring new debts when they knew that existing debts could not be paid (refer to ASIC’s guide to insolvency for directors if you would like to extend your understanding further).

The cash budget is the combined budget of all inflows and outflows of cash. It should be divided into the shortest time period possible, so management can be quickly made aware of potential problems resulting from fluctuations in cash flow. One goal of this budget is to anticipate the timing of cash inflows and outflows, which allows a company to try to avoid a decrease in the cash balance due to paying out more cash than it receives. In order to provide timely feedback and alert management to short-term cash needs, the cash flow budget is commonly geared toward monthly or quarterly figures. (Figure) shows how the other budgets tie into the cash budget.

Because the cash budget accounts for every inflow and outflow of cash, it is broken down into smaller components. The cash receipts schedule includes all of the cash inflow expected to be received from customer sales, whether those customers pay at the same rate or even if they pay at all. The cash receipts schedule includes all the cash expected to be received and does not include the amount of the receivables estimated as uncollectible. The cash payments schedule plans the outflow or payments of all accounts payable, showing when cash will be used to pay for direct material purchases. Both the cash receipts schedule and the cash payments schedule are included along with other cash transactions in a cash budget. The cash budget, then, combines the cash collection schedule, the cash payment schedule, and all other budgets that plan for the inflow or outflow of cash. When everything is combined into one budget, that budget shows if financing arrangements are needed to maintain balances or if excess cash is available to pay for additional liabilities or assets.

The operating budgets all begin with the sales budget. The cash receipts schedule does as well. Since purchases are made at varying times during the period and cash is received from customers at varying rates, data are needed to estimate how much will be collected in the month of sale, the month after the sale, two months after the sale, and so forth. Bad debts also need to be estimated, since that is cash that will not be collected.

To illustrate, let’s return to Big Bad Bikes. They believe cash collections for the trainer sales will be similar to the collections from their bicycle sales, so they will use that pattern to budget cash collections for the trainers. In the quarter of sales, 65% of that quarter’s sales will be collected. In the quarter after the sale, 30% will be collected. This leaves 5% of the sales considered uncollectible. Uncollectible sales are those accounts receivables that cannot be collected and must be converted from an asset (Accounts receivable) to an Expense. These uncollectible sales are called bad debts and we will explore these in more detail in the follow up textbook, Accounting Business and Society.

The diagram below illustrates when each quarter’s sales will be collected. An estimate of the net realisable balance of Accounts Receivable can be reconciled by using information from the cash collections schedule:

For example, in quarter 1 of year 2, 65% of the quarter 1 sales will be collected in cash, as well as 30% of the sales from quarter 4 of the prior year. There were no sales in quarter 4 of the prior year so 30% of zero sales shows the collections are $0. Using information from Big Bad Bikes sales budget, the cash collections from the sales are shown in (Figure) .

When the cash collections schedule is made for sales, management must account for other potential cash collections such as cash received from the sale of equipment or the issuance of stock. These are listed individually in the cash inflows portion of the cash budget.

The cash payments schedule, on the other hand, shows when cash will be used to pay for Accounts Payable. One such example are direct material purchases, which originates from the direct materials budget. When the production budget is determined from the sales, management prepares the direct materials budget to determine when and how much material needs to be ordered. Orders for materials take place throughout the quarter, and payments for the purchases are made at different intervals from the orders. A schedule of cash payments is similar to the cash collections schedule, except that it accounts for the company’s purchases instead of the company’s sales. The information from the cash payments schedule feeds into the cash budget.

Big Bad Bikes typically pays half of its purchases in the quarter of purchase. The remaining half is paid in the following quarter, so payments in the first quarter include payments for purchases made during the first quarter as well as half of the purchases for the preceding quarter. (Figure) shows when each quarter’s purchases will be paid. Additionally, the balance of purchases in Accounts Payable can be reconciled by using information from the cash payment schedule as follows:

The first quarter of the year plans cash payments from the prior quarter as well as the current quarter. Again, since the trainers are a new product, in this example, there are no purchases in the preceding quarter, and the payments are $0. (Figure) .

While the cash payments schedule is made for purchases of material on account, there are other outflows of cash for the company, and management must estimate all other cash payments for the year. Typically, this includes the manufacturing overhead budget, the sales and administrative budget, the capital asset budget, and any other potential payments of cash. Since depreciation is an expense not requiring cash, the cash budget includes the amount from the budgets less depreciation. Cash payments are listed on the cash budget following cash receipts. (Figure) shows the major components of the cash budget.

The cash budget totals the cash receipts and adds it to the beginning cash balance to determine the available cash. From the available cash, the cash payments are subtracted to compute the net cash excess or deficiency of cash for the quarter. This amount is the potential ending cash balance. Organizations typically require a minimum cash balance. If the potential ending cash balance does not meet the minimum amount, management must plan to acquire financing to reach that amount. If the potential ending cash balance exceeds the minimum cash balance, the excess amount may be used to pay any financing loans and interest.

Big Bad Bikes has a minimum cash balance requirement of $10,000 and has a line of credit available for an interest rate of 19%. They also plan to issue additional capital stock for $5,000 in the first quarter, to pay taxes of $1,000 during each quarter, and to purchase a copier for $8,500 cash in the third quarter. The beginning cash balance for Big Bad Bikes is $13,000, which can be used to create the cash budget shown in (Figure) .

Budgeted balance sheet

The cash budget shows how cash changes from the beginning of the year to the end of the year, and the ending cash balance is the amount shown on the budgeted balance sheet. The budgeted balance sheet is the estimated assets, liabilities, and equities that the company would have at the end of the year if their performance were to meet its expectations. Creating a budgeted balance sheet is a more advanced skill not covered in this text.

If you want to learn more about this – please refer to the OpenStax textbook Principles of Financial Accounting 2 and section 7.3  (this textbook uses Principles of Financial Accounting 1 and 2 as a source of material – however our budgeting chapter has been adjusted for an introductory audience).

Preparing a cash budget Copyright © by Mitchell Franklin; Patty Graybeal; Dixon Cooper; and Amanda White is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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What Is a Cash Budget?

How a cash budget works.

• Short-Term vs. Long-Term Budgets

Special Considerations

• Cash Budget FAQs
• Corporate Finance

Cash Budget Definition: Parts and How to Create One

A cash budget is an estimation of the cash flows of a business over a specific period of time. This could be for a weekly, monthly, quarterly, or annual budget. This budget is used to assess whether the entity has sufficient cash to continue operating over the given time frame. The cash budget provides a company insight into its cash needs (and any surplus) and helps to determine an efficient allocation of cash.

Key Takeaways

• A cash budget is a company's estimation of cash inflows and outflows over a specific period of time, which can be weekly, monthly, quarterly, or annually.
• A company will use a cash budget to determine whether it has sufficient cash to continue operating over the given time frame.
• A cash budget will also provide a company with insight into its cash needs and any surpluses, which help it determine if the business is using cash effectively.
• Cash budgets can be viewed as short-term cash budgets, usually, a time frame of weeks to months, or long-term cash budgets, which are viewed as years.
• A company must manage its sales and expenses to reach optimal cash flow.

Investopedia / Ellen Lindner

Companies use sales and production forecasts to create a cash budget, along with assumptions about necessary spending and accounts receivable collections. A cash budget is necessary to assess whether a company will have enough cash to continue operations. If a company does not have enough liquidity to operate, it must raise more capital by issuing stock or taking on more debt.

A cash roll forward computes the cash inflows and outflows for a month, and it uses the ending balance as the beginning balance for the following month. This process allows the company to forecast cash needs throughout the year, and changes to the roll forward to adjust the cash balances for all future months.

Short-Term Cash Budget vs. Long-Term Cash Budget

Cash budgets are usually viewed in either the short-term or the long-term. Short-term cash budgets focus on the cash requirements needed for the next week or months whereas long-term cash budget focuses on cash needs for the next year to several years.

Short-term cash budgets will look at items such as utility bills, rent, payroll , payments to suppliers, other operating expenses, and investments. Long-term cash budgets focus on quarterly and annual tax payments, capital expenditure projects, and long-term investments. Long-term cash budgets usually require more strategic planning and detailed analysis as they require cash to be tied up for a longer period of time.

It's also prudent to budget cash requirements for any emergencies or unexpected needs for cash that may arise, particularly if the business is new and all aspects of operations are not fully realized.

At the end of each budgetary term, the ending balance of the cash budget is carried forward to the next term's cash budget.

Managing a cash budget also comes down to carefully managing the growth of the business. For example, all businesses want to sell more and grow, but it is crucial to do so in a sustainable way.

For example, a company may implement a marketing strategy to boost brand awareness and sell more products. The ad campaign is successful and demand for the product takes off. If the company isn't prepared to meet this increase in demand, for example, it may not have enough machinery to produce more goods, enough employees to conduct quality checks, or enough suppliers to order the required raw materials , then it could have many unhappy customers.

The company may want to build out all these aspects to meet demand, but if it doesn't have enough cash or financing to be able to do so, then it cannot. Therefore, it is important to manage sales and expenses to reach an optimal level of cash flow.

Example of a Cash Budget

For example, let's assume ABC Clothing manufactures shoes, and it estimates $300,000 in sales for the months of June, July, and August. At a retail price of $60 per pair, the company estimates sales of 5,000 pairs of shoes each month. ABC forecasts that 80% of the cash from these sales will be collected in the month following the sale and the other 20% will be collected two months after the sale. The beginning cash balance for July is forecast to be $20,000, and the cash budget assumes 80% of the June sales will be collected in July, which equals $240,000 (80% of $300,000). ABC also projects $100,000 in cash inflows from sales made earlier in the year.

On the expense side, ABC must also calculate the production costs required to produce the shoes and meet customer demand. The company expects 1,000 pairs of shoes to be in the beginning inventory, which means a minimum of 4,000 pairs must be produced in July. If the production cost is $50 per pair, ABC spends $200,000 ($50 x 4,000) in the month of July on the cost of goods sold , which is the manufacturing cost. The company also expects to pay $60,000 in costs not directly related to production, such as insurance.

ABC computes the cash inflows by adding the receivables collected during July to the beginning balance, which is $360,000 ($20,000 July beginning balance + $240,000 in June sales collected in July + $100,000 in cash inflows from earlier sales). The company then subtracts the cash needed to pay for production and other expenses. That total is $260,000 ($200,000 in cost of goods sold + $60,000 in other costs). ABC’s July ending cash balance is $100,000, or $360,000 in cash inflows minus $260,000 in cash outflows.

What Are the Steps of Creating a Cash Budget?

The first step to creating a cash budget is to establish reliable forecasts of the company's cash inflows and outflows. Some of these flows will be predictable, such as rent and payroll costs. Others, like sales figures, will tend to be more variable. Once these figures have been estimated, it is possible to prepare a cash budget that accounts for all expected inflows and outflows.

What Expenses Should Be Included in a Cash Budget?

A cash budget should take into account expected cash flows, such as revenue, as well as operational outflows due to returns, payroll, rent, utilities, supplies, and other costs of running the business.

How Do You Prepare a Cash Budget?

This will depend on the time frame for which the budget is being prepared. A short-term cash budget of a few weeks will only account for day-to-day expenses related to funding and supplying a company's operations, while a cash budget for a quarter or longer might also account for larger expenses like equipment, capital investment, and corporate taxes. In each case, any remaining cash surplus at the end of one budget period will be carried on to the beginning of the next.

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Cash Budget Definition

A cash budget is a detailed financial document that outlines the estimate of cash inflows (income) and outflows (expenses) for a specific period of time, usually to ensure that an individual or business has sufficient cash to meet its obligations. It helps in managing liquidity and in planning for future cash needs.

Components of a Cash Budget

The key components of a cash budget typically include cash inflows , cash outflows , and the ending cash balance .

Cash Inflows

Cash inflows comprise all the cash that a company or individual expects to receive within a specific period. This could be from sales of goods or services, debt collection, asset sale, return on investments, or other sources of income. In company settings, inflows usually come from operations such as sales and may also include cash from financing activities such as loans or investments.

Extensive tracking and management of cash inflows allow for better financial planning. For instance, knowing your anticipated cash inflows helps in determining whether you can afford to engage in certain investments or need to find additional sources of income.

Cash Outflows

Moving on, we have the cash outflows . These are amounts that you anticipate spending within a specific period. These could be routine operational expenses like wages or rent, purchases of assets or investments, payment of debts, or any other form of expenditure. In a business setting, outflows could emerge from operational activities such as purchasing inventory, as well as financing activities such as paying off loans.

Assessing your cash outflows is equally critical in managing finances. By identifying and controlling unnecessary or excessive expenditure, you can reduce your outflows, which in turn can boost cash inflow rates or even result in accumulated savings.

Ending Cash Balance

Finally, the ending cash balance signifies the cash amount that remains at the end of the budget period, given the starting cash balance, cash inflows, and cash outflows.

The ending balance provides valuable insights into a company's financial health and sustainability. A consistently high ending balance indicates sustainable operations, while frequent negative balances could signify financial troubles. This information is instrumental in making strategic financial decisions. It can guide actions relating to borrowing, investments, expenditure scaling, and even inform dividend distribution in the context of businesses.

Remember, the ultimate role of each component of a cash budget is to aid in revenue optimization, better expenditure control, and overall financial health. Each part has its own importance but collectively, they provide a comprehensive picture of financial status and growth.,

Benefits of Cash Budgeting

Sure, below is the information presented in markdown format:

Increased Financial Awareness

One of the key advantages of maintaining a cash budget is the heightened awareness it brings to your financial situation. It provides a clear and detailed view of income versus expenditures, allowing you to see where your money is going each month. This awareness can act as a reality check and encourage you to reevaluate your spending habits where necessary.

Capability to Make Informed Spending Decisions

The transparency provided by a cash budget paves the way for conscious, informed spending decisions. With a comprehensive overview of your income and expenses, you can plan ahead and allocate funds accordingly. It empowers you to make wise choices without having to guess or make assumptions. You can identify non-essential expenses and determine whether certain costs can be scaled back or cut out entirely.

Improved Saving Habits

Not only does a cash budget help in managing your current income and expenses, it also aids in fostering improved savings habits. By setting firm spending limits, you naturally create opportunities to save more. A well-maintained cash budget can reveal surplus money that could potentially be channeled into your savings account. This systematic saving approach can facilitate reaching financial goals, whether it's for an emergency fund, vacation, or retirement.

Efficient Debt Management

If you have loans or debts, a cash budget can be instrumental in efficient debt management. With a full view of your financial situation, you can strategize a payment schedule that aligns with your income and other expenses. This helps to avoid defaulting, late fees, and potential issues with your credit score.

Stress Reduction

Lastly, although less quantifiable, the peace of mind that cash budgeting brings cannot be underestimated. Knowing your financial status and being in control reduces stress and anxiety related to money matters. It provides a level of financial certainty and helps avoid unpleasant financial surprises down the line.

Challenges in Cash Budgeting

In crafting a cash budget, there are inevitable challenges and pitfalls that one may encounter. These can render the budget less useful and even counterproductive if not properly managed. Here, we will examine some of the most common obstacles and how they may impact the efficacy of a cash budget.

Inaccurate Revenue Predictions

Firstly, one of the principal hurdles is inaccurate revenue predictions. Estimating future income is an art in itself and inaccuracies can lead to significant budgetary discrepancies down the line. Overestimating your revenue may result in overspending, while underestimating can result in missed opportunities or unnecessary cost-cutting measures. This is especially tricky for businesses with irregular income streams, where predicting future income becomes even more of a challenge.

Unexpected Expenses

Another typical challenge in cash budgeting comes in the form of unexpected expenses. These can arise from various sources such as emergencies, price hikes, repairs, or unforeseen operational costs. No matter how meticulously crafted your budget is, it can quickly be thrown into disarray by an unanticipated outlay. Prudence dictates creating a contingency fund to handle such events, but doing so might also limit the cash available for other planned activities.

Volatility in Cash Flows

Perhaps one of the more complex problems in cash budgeting is managing volatility in cash flows. This can be particularly problematic for entities engaged in industries prone to seasonal variations or cyclical demand. It is crucial for these businesses to meticulously align their expenditure with their anticipated revenues, or risk running into liquidity issues.

To summarize, accurate revenue prediction, unexpected expenses, and volatility in cash flows pose significant challenges in cash budgeting. Understanding these difficulties and considering them while preparing a cash budget can equip businesses to predict and manage their cash flow more effectively, paving the way for more sustainable financial health.

Cash Budget vs. Accrual Accounting

Comparing cash budgeting and accrual accounting.

Cash budgeting and accrual accounting are two different tools used for managing the financial aspects of a company, each with its own pros and cons.

Cash Budgeting

Firstly, cash budgeting is known for its simplicity and directness. Businesses get a clear picture of their cash inflow and outflow, making it straightforward to manage assets in the short term.

However, its simplicity can also be a drawback. Cash budgeting doesn't account for credit transactions until cash is exchanged, potentially painting an incomplete financial picture. It is also poor at integrating overall growth prospects, since it focuses exclusively on cash.

Cash budgeting is suited to small businesses or those with tight cash flows – where short-term assets management is a priority and credit transactions are minimal or non-existent.

Accrual Accounting

On the other hand, accrual accounting provides a more holistic perspective of the company's finances. It records expenses and income when they're incurred or earned, not simply when cash changes hands.

Although providing a more detailed picture, accrual accounting is more complex and requires a higher degree of understanding, competency and time investment. It also can make short-term cash management harder, since accruing revenues and expenses might not be immediately reflected in cash flow.

Accrual accounting is suitable for businesses with moderate-to-high volume of credit transactions and those aspiring for or experiencing growth. It's less appropriate for businesses that focus heavily on cash transactions or have limited resources for accounting.

In conclusion, both methods have distinct advantages and are applicable in different settings. A careful assessment of your company's size, growth prospects, transaction methods and resources can guide the choice between cash budgeting and accrual accounting.

Role of Cash Budgeting in Financial Planning

Cash budgeting plays an integral role in a company's overall financial planning strategy by supporting informed decisions about capital allocation, risk management, and achieving long-term financial goals.

Capital Allocation

A cash budget is a fundamental tool when considering capital allocation, i.e., how a company divides and directs its financial resources. It offers a clear understanding of the incoming and outgoing funds, enabling companies to determine the best use for their available capital. Without a cash budget, it becomes significantly harder to identify the areas in a company that need or could use more capital, such as expansion, research and development, or inventory growth.

Risk Management

In terms of risk management, a cash budget can act as an early warning system. It estimates future cash inflows and outflows and thus helps businesses forecast potential cash shortages or excesses. Effective cash budgeting allows businesses to anticipate cash flow problems, providing opportunities to proactively address the situation. By allowing a company to prepare for a cash crunch or surplus in advance, it can prevent damage to its credit rating and business relationships or take advantage of investment opportunities.

Achieving Financial Goals

Finally, a cash budget plays a pivotal role in setting and achieving financial goals. It sets a financial roadmap for management to follow, enabling leaders to determine whether the company is on track to meet its objectives. Regular review and revision of cash budgets help adjust the path, ensuring the company stays on the right track to meet its monetary targets. It encourages discipline in spending and prompts constructive conversation about cost-saving measures or potential growth opportunities that contribute directly towards profitability goals.

In all, successful cash budgeting acts as the backbone of thorough financial planning and can significantly influence a company's effectiveness in managing ongoing capital needs, mitigating financial risks, and propelling towards financial targets.

Implications of Cash Budgets in CSR and Sustainability

Cash budgeting is an important tool that can indirectly support Corporate Social Responsibility (CSR) initiatives and sustainability goals. This might initially appear non-intuitive, given that cash budgets primarily deal with the management of inflows and outflows of cash in a business, and appear far removed from environmental and social concerns. However, the connection becomes clearer upon a more detailed investigation.

Efficient Use of Resources

Firstly, a cash budget can promote the efficient use of resources. With a well-managed cash budget, a company can carefully plan its expenditures, focusing on areas that yield the highest returns or contribute more substantially to its growth. By highlighting costly or inefficient areas, companies could be persuaded to find alternative methods or materials that are not only cost-effective but more sustainable.

For example, a company could realize through its cash budgeting process that its energy costs are higher than the industry standard. To reduce these costs, it might decide to invest in renewable energy sources such as solar panels or wind turbines. While requiring initial investments, these energy sources would reduce running costs in the longer term and also align the company with CSR norms and sustainability goals.

Minimizing Waste

Secondly, cash budgets can help in minimizing waste. Since a cash budget involves carefully monitoring inflows and outflows based on calculated estimation, it prevents both direct and indirect wastage. Direct in terms of tangible resources like raw materials, time, or labor, and indirect in terms of opportunity costs.

For instance, companies may cut down on surplus raw materials that would otherwise go to waste, instead opting to purchase based on accurate projection of demand via cash budgeting. Simultaneously by assigning the available cash to profitable projects over non-profitable ones, the opportunity cost is minimized.

Furthermore, reduced wastage promotes sustainability by lessening the demand for natural resources and lowering the amount of waste generated that ends up in landfills – thus fulfilling a key sustainability goal.

Trust and Reputation

Finally, the cash budget can indirectly contribute to CSR by helping build trust and improve a company’s reputation. Well-managed finances are often an indication of strong business management, which can boost stakeholder confidence. This increased trust can also enhance the company's reputation with regards to being a responsible and sustainable enterprise.

Therefore, while cash budgeting may not be the first thing to come to mind when considering CSR and sustainability, careful and intelligent use of this tool can certainly help an organization improve its environmental and social impact.

Software and Tools for Cash Budgeting

The inception of the digital world has made cash budgeting become an easier and more efficient task, due to the availability of several software and tools for this task. These tools streamline the process of cash budgeting and enhance accuracy, efficiency, and forecasting capabilities.

Using Spreadsheets for Cash Budgeting

Spreadsheets such as Microsoft Excel and Google Sheets are a common tool for cash budgeting, mainly due to their flexibility and ease of use. They allow you to keep track of income and expenses in real-time, apply mathematical functions for automatic calculations, and create charts and graphs for visual representations of your budget. However, spreadsheets require an initial setup time and a good understanding of the software. They also can be prone to human errors in data entry or formula setup.

Envelopes: A Traditional Budgeting Tool

The envelope system is a traditional but very effective method for cash budgeting. Each envelope represents a specific budgeting category, like groceries, rent, or utilities, with the budgeted amount of cash inside. Once the cash in the envelope is gone, spending in that category is done for the month. Some apps like Goodbudget have digitized this concept for modern use.

Budgeting Software

There are various budgeting software available that are designed to automate and simplify the budgeting process. These can range from simple applications focusing on expense tracking and budget creation, to sophisticated software allowing for real-time financial data synchronization, financial reporting and forecasting. Examples include Quicken, Mint, and You Need a Budget (YNAB). These digital tools often provide a more real-time and comprehensive picture of your financial situation, and some even give you the option to categorize your expenses and set budget goals.

Online Budgeting Tools

Online tools such as Mint, PocketGuard, and Personal Capital allow you to link various financial accounts together, giving you a centralized interface to view your budgeting information. These tools automatically update and categorize your transactions, reducing the hassle of manual entry.

All these software and tools have their own strengths and limitations. It’s important to try out different ones and find the one that best suits your personal needs and cash budgeting goals. They can significantly enhance the management and visibility of your finances, making the often daunting task of budgeting a much more manageable and even enjoyable process.

Remember, the key to successful cash budgeting is consistency, accuracy, and regular reviews of your income and expenses to stay on track. Therefore, finding a tool that you are comfortable with and can reliably use is critical in maintaining a successful cash budget.

Maintaining a Flexible Cash Budget

Maintaining a flexible cash budget offers you financial stability amidst unforeseen changes in your economic situation. Here are a few tips that can guide you.

Regular Reviews

It is vital to review your cash budget regularly. This will ensure your budget reflects any changes in your income and expenses and help you adjust appropriately. For monthly budgeters, an end-of-month review would be ideal. If there are frequently changing variables in your budget, it might be worth reviewing bi-monthly or even weekly.

Scenario-Based Changes

It's beneficial to factor in potential scenario-based changes. This means thinking ahead about possible alterations in your financial situation and planning your cash budget accordingly. For example, how will your budget change if you were to lose your job? Or what if you receive a hefty end-of-year bonus? By considering both negative and positive scenarios, you can prepare a cash budget that is flexible and can easily adapt to changes.

Keeping a Buffer

Lastly, always keep a buffer for unexpected expenses. This could be an unforeseen medical bill, an abrupt car repair, or sudden home maintenance. By allocating a certain amount in your budget specifically for unanticipated costs, you can mitigate stress related to unforeseen financial hurdles. This also prevents you from tapping into funds allocated for necessities or savings.

To sum it up, regularly reviewing your cash budget, accounting for scenario-based changes, and keeping a buffer for unpredictable expenses can help make your cash budget adaptable enough to handle fluctuations efficiently.

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Cash Budget: What is it, Components and How to Prepare One?

Table of Contents

Introduction

A cash budget is a financial planning tool that forecasts a business’s cash inflows and outflows over a specific period. By outlining expected revenues and expenditures, the cash budget definition acts as a roadmap to guide enterprises in allocating resources, ensuring timely payments, and maintaining financial stability.

A budget is basically “telling your money where to go.”

Cash is often referred to as the lifeblood of a business. Monitoring and reporting all expenses, profits, and investments help you control the company’s finances. A cash budget is prepared to plan and control the cash involved in your business. Specifying the cash flow path puts you in the driver’s seat. 

In this article, we explain the various facets of the cash budget and the benefits it provides. 

What is a cash budget?

A cash budget is a financial statement that outlines a company’s expected cash inflows and outflows over a period of time. It could be a weekly, monthly, quarterly, or annual budget. 

The cash inflows include 

• Beginning cash balance
• Cash receipts from cash sales 
• Accounts receivable collections 
• Sale of assets 

The cash outflows include 

• Cumulative planned expenditures from material, labor, manufacturing, or administrative budgets 
• Fixed asset purchases 
• Dividends to shareholders

The objective of a cash budget is to forecast future cash balances and to predict potential deficits and surpluses. The importance of a cash budget goes well beyond this, as is apparent in the following section.

Read About: Best Financial Management Tools

What is the importance of a cash budget?

Did you know? 82% of businesses suffer due to poor cash management. That emphasizes the importance of creating and sticking to a cash budget.

Cash is a critical component of daily operations for almost all organizations. It can help businesses maintain the right level of liquidity to optimize their operations. Therefore, creating a cash budget becomes a critical process. It holds true for even those organizations that are not cash-intensive.

The following points will further demonstrate the importance of cash budgets.

• Easy to read and understand : It helps simplify financial processes by directly listing the amount of money the company can expect to have at any time. 
• Highlights potential cash deficits : It helps to determine when to apply for extra financing and adjust costs to maintain cash balances. 
• Identifies periods of excess cash : Knowing when extra cash is generated can help financial planners effectively use capital. 
• Helps forecast expenses : By identifying periods where expenses run higher, you can proactively take measures to regulate expenses.
• Provides a helpful map of sources and uses of cash : It can be used to create efficiencies in processes. For example, if revenue is high for a period, but cash collections are low, it alerts to address the collection cycles and manage receivables better. 

The importance of a cash budget can be two-pronged: managing cash flows for a specified period and ensuring financial stability and overall business success.  

What is the purpose of cash budget in business management?

Imagine a small manufacturing company, ABC, creating a cash budget to monitor its cash inflows and outflows monthly. 

The purpose is to ensure the business

• Can manage its day-to-day expenses 
• Plan for upcoming investments 
• Prevent cash shortages
• Achieve financial stability
• Maintain a healthy cash flow position

Significance of effective cash flow management

For ABC, the significance of the cash budget lies in its ability to provide the company with a roadmap for efficient financial management . 

1. By accurately projecting cash flows, ABC can make informed decisions about 

• Inventory purchases 
• Equipment upgrades
• Staffing levels

2. It allows ABC to

• Negotiate better credit terms with suppliers
• Avoid late payment penalties
• Seize timely investment opportunities

3. The cash budget’s significance extends to strategic planning,

• Enabling the company to allocate resources efficiently 
• Enhance operational efficiency 
• Plan for long-term growth

So, what components make up the cash budget? Well, let’s take a look.

Quick Read: Cash Flow Statements: A Comprehensive Guide

What are the components of a cash budget?

The major components of a cash budget are the cash inflows and the cash outflows. These determine the opening and ending cash balances for the budget period. 

1. Cash inflows

Here are the typical revenue streams contributing to your business’s cash inflow.

1.1 Sales revenue

Sales revenue projections estimate the income generated from the sale of goods or services. Accuracy of sales forecasts is crucial for planning cash inflows. Historical data, market research, and sales trends can help make reliable revenue projections.

For example, if you launch a new product in the budget period and expect a 10% increase in sales, the additional revenue can be factored into the cash flow projections.

1.2 Other income sources

Besides core business activities, businesses may generate income from various secondary sources. It could include 

• Rental income
• Licensing fees
• Other forms of supplementary revenue 

Incorporating these sources into the cash flow section provides a more comprehensive view of the company’s cash inflows.

1.3 Investment returns

You may have investments in stocks, bonds, or other financial instruments. Investment returns, such as stock dividends or bond interest, contribute to the overall cash inflow. Including these returns in the cash flow section provides visibility into passive income earned by the company.

For example, if you hold stocks in other corporations and receive cash dividends, it must be included in the cash flow projections.

2. Cash outflows

These represent all the anticipated expenses of your business. They are incorporated into the cash outflow section of the budget. Cash outflows should be less than cash inflows to maintain a positive cash flow for your business. 

2.1 Operating expenses

Operating expenses encompass the day-to-day costs of running the business. 

It includes expenditures on

• Raw material purchases and inventory costs
• Employee salaries and benefits
• Utilities and overhead costs

Monitoring and controlling these expenses are crucial for maintaining a cash surplus.

For example, by optimizing inventory levels and negotiating better deals with suppliers, you can reduce raw material costs, positively impacting cash flow.

2.2 Capital expenditures

Capital expenditures represent investments in long-term assets such as equipment, machinery, or property. While these investments are necessary for business growth, they can significantly impact short-term cash flow. Careful planning and budgeting are essential to balance capital investments with available cash resources.

For example, a company planning to expand its production capacity might invest in new machinery. It will impact cash flow in the short term but potentially lead to increased revenue in the long term.

2.3 Debt repayments

Debt repayments involve paying back loans or credit for business operations or expansions. You must ensure that debt obligations are met on time to maintain a good credit standing and prevent additional financial costs.

For example, creating a repayment schedule aligned with the business’s cash flow cycle can help meet debt obligations without compromising short-term liquidity.

2.4 Taxes and other obligations

Businesses must pay various taxes, including sales tax, income tax, and payroll taxes. Other financial obligations, such as lease payments and supplier agreements, must be fulfilled. Effective tax planning and meeting contractual obligations are essential to control cash outflows.

Net Cash Flow = Cash Inflows – Cash Outflows

A positive net cash flow indicates that the cash inflows exceed the cash outflows, signifying healthy financial operations.

Cash budget format

The basic format of a cash budget includes four sections: cash inflows, cash outflows, cash excess or deficiency, and details of financing activities. Companies may organize, categorize, and customize income and expenses according to their business needs. 

Here is a basic cash budget format. 

1. Opening Balance

Starting Cash Balance for the Month/Period

2. Cash inflows

• Sales revenue: Breakdown of expected sales revenue
• Other income: Income from investments, interest

Total Cash Inflows: Sales Revenue + Other Income

3. Cash outflows

3.1 operating expenses.

• Raw Materials and Inventory Costs
• Employee Salaries and Benefits
• Utilities and Overhead Costs

3.2 Other expenses

• Capital Expenditures: Investments in Equipment, Machinery
• Debt Repayments: Loan Repayments, Interest Payments
• Taxes and Other Obligations: Tax Payments, Legal Fees

Total Cash Outflows:  Operating expenses + Expenses from financing activities

4. Cash excess or deficiency

Net Cash Flow: Total Cash Inflows – Total Cash Outflows

5. Financing section

Cumulative borrowings are required to maintain the desired cash balance

6. Closing balance

Net Cash Flow + Opening Balance + Cumulative borrowings

Having set the format, let’s explore the intricacies of preparing a cash budget.”

How to prepare a cash budget?

Preparing a cash budget involves careful planning and analysis of a business’s expected cash inflows and outflows over a specific period.

Consider the following key steps when preparing a cash budget.

1. Data collection and analysis

It is essential to collect and study the historical financial data of your business to make realistic projections. 

1.1 Historical financial data and estimation

• Gather historical financial data, sales records, and expense reports to understand past cash flows. 
• Decide the time frame for your cash budget. Standard periods include monthly, quarterly, or annually. Shorter periods help with detailed planning.
• List all sources of cash inflow, including sales, investments, loans, and any other sources of revenue for the specific budget period.
• Compile a list of all anticipated cash outflows. Categorize them into operating expenses (salaries, utilities, supplies), capital expenditures (equipment, technology), debt repayments, taxes, and other expenses.

1.2 Market research and projections

• Based on historical data and market analysis, project your cash inflows. It is crucial to consider seasonal fluctuations and new sales initiatives or products that might impact revenue.
• Break down your expected cash outflows by category. Consider both fixed costs (rent, salaries) and variable costs (production supplies, utilities) and any one-time expenses
• The cash outflow projection should include new loans, repayments, or equity investments
• Calculate Net Cash Flow by subtracting total cash outflows from total cash inflows 
• In case of a surplus, it can be allocated to investments or debt reduction. A deficit must trigger strategies like cutting expenses and renegotiating terms with suppliers to cover the shortfall.

2. Budgeting techniques

Effective cash budget methods can help maximize cash flow. Different budgeting techniques are suitable for different situations. It is best to consider the advantages and disadvantages of cash budget methods to meet your specific business needs. 

Here are a few budgeting techniques that you could choose from. 

2.1 Zero-based budgeting (ZBB)

This technique starts from a “zero base,” with every business expense being analyzed and justified from scratch, regardless of previous budgets. It is a comprehensive approach that explains incoming and outgoing resources, thus minimizing unnecessary expenditures. 

This approach encourages efficiency.

2.2 Incremental budgeting

Incremental budgeting involves adjusting the previous period’s budget to account for changes. It’s a straightforward method where the existing budget serves as a baseline, and adjustments are made incrementally based on specific needs or changes in the business environment. 

It is a popular budgeting technique, especially for businesses with stable operations and predictable expenses. 

2.3 Activity-based budgeting

Activity-based budgeting links budgetary resources to specific activities or projects that drive the costs and revenue of your business. 

It involves identifying the critical activities and allocating resources based on their impact on the business. It ensures optimizing costs and precise allocation of funds.

Read More: Business Budgeting: Types, Components and Importance

3. Cash flow forecasting

Forecasting enables businesses to predict cash flows over a specific period. Cash positions can be estimated accurately by

• Analyzing historical data
• Anticipating future sales
• Considering various expenses

A proactive approach to forecasting the cash flow aids in 

• Identifying potential liquidity issues 
• Allowing for timely adjustments and strategic planning 
• Making informed decisions

Businesses can forecast cash flow to create a short-term cash budget or a long-term cash budget. 

3.1 Short-term vs long-term forecasts

3.2 Predicting seasonal cash flows

Predicting seasonal forecasts is a meticulous process that involves 

• Analyzing past years’ records
• Identifying patterns
• Segmenting data into seasonal periods
• Understanding the factors influencing seasonal fluctuations in cash flow
• Employing statistical methods to identify trends and forecast future patterns

It is essential to consider internal and external factors, such as growth, changes in operations, economic conditions, and industry trends while predicting seasonal cash flows.

Preparing a cash flow calendar overviews the expected highs and lows throughout the year. It helps businesses manage cash flows effectively during both peak seasons and off-peak periods.

3.3 Sensitivity analysis and risk assessment

Sensitivity analysis and risk assessment are essential components of cash flow forecasting. They provide businesses with potential financial outcomes under different scenarios and identify potential risks.

Sensitivity analysis involves studying how changes in key variables, such as sales volumes, pricing, or production costs, impact cash flows. By adjusting these variables, businesses can assess the sensitivity of their cash flow projections. It helps understand the vulnerable points of the forecast and enables businesses to make contingency plans accordingly.

Risk assessment helps identify potential risks that could affect cash flow predictions. These risks might include 

• Market volatility 
• Economic downturns
• Supplier issues
• Unexpected expenses

By evaluating the probability and impact of these risks, you can develop risk mitigation strategies like

• Building cash reserves
• Securing credit lines
• Diversifying suppliers
• Creating flexible budgets 

Businesses can enhance the accuracy of their forecasts by considering different scenarios and potential risks. It can make them more resilient in the face of uncertainties.

Once the cash budget is prepared, the next step is to monitor and update it according to the business environment. 

Read More: Cash Flow Forecasting: What is it, Components, Methods, Process & Formats

Monitoring and adjusting your cash budget

Monitoring and adjusting a cash budget is necessary to reap its benefits. The following are the key steps for this process. 

• Regular tracking and recording : It provides a real-time snapshot of the cash flow in your company. 
• Analyzing variances : Analyzing variations between actual and projected figures alerts you of discrepancies.
• Making necessary adjustments : Once discrepancies are identified, making necessary adjustments becomes crucial. It ensures the budget remains aligned with the current business scenario. 
• Staying Disciplined : “They call it a budget, so you don’t budge from it.” – Mike Figgis. You need to adhere to the adjusted budget to make it work efficiently. 

Monitoring and updating a cash budget is a smart move with a big payoff, offering multiple benefits to your business.

What are the benefits of cash budgeting?

“Used correctly, a budget doesn’t restrict you; it empowers you.” – Tere Stouffer.

Cash budgeting helps you manage your daily tasks and achieve long-term success.

Here’s what you gain by cash budgeting.

• Improved liquidity management : Cash budgeting prevents cash shortages and financial crises by ensuring a business has enough cash to cover its short-term obligations. 
• Enhanced planning and goal setting : It allows for effective financial planning by forecasting cash inflows and outflows, enabling businesses to allocate resources efficiently and make informed financial decisions.
• Early detection of financial issues : Cash budgeting prepares businesses for unexpected expenses or emergencies by ensuring they have reserve funds to cover unforeseen economic challenges.
• Better decision-making : Accurate cash budgeting provides valuable insights for strategic decision-making, enabling businesses to plan for growth, expansion, and long-term investments.

Other benefits include

• Better vendor relationships due to managing cash flows efficiently
• Serving as a benchmark for performance evaluation
• Promoting financial discipline by maintaining costs within the allocated budget
• Managing debt repayments effectively
• Identifying surplus cash to make profitable investments

Cash budgeting acts like a roadmap, easing financial stress for businesses. However, there are cash budget problems that companies have to overcome.

What are the challenges in cash budgeting?

Navigating cash budgeting exposes businesses to diverse challenges. But what are the most significant hurdles? Let’s delve into the answers.

1. Uncertain economic factors

Cash budgeting becomes complex due to unpredictable economic factors. A business’s purchasing power and profitability are significantly impacted by

• Fluctuating interest rates
• Currency value changes 

Constant vigilance and strategic planning can help the cash budget to adapt to such economic uncertainties.

2. Inaccurate sales projections

The accuracy of sales forecasts is one of the pivotal cash budget problems. Overestimating sales can lead to overcommitting resources, while underestimating can result in missed opportunities. 

To ensure the cash budget aligns with the actual revenue streams, you need to balance these projections with

• Market demand
• Consumer behavior 
• Industry trends 

3. Overlooking unforeseen expenses

Cash budgets often falter due to unforeseen expenses. 

While regular operating costs are usually accounted for, unexpected events like 

• Equipment breakdowns 
• Legal issues
• Sudden regulatory changes 

can strain financial resources. 

Failing to anticipate and budget for these unforeseen expenses can create significant gaps in the cash flow, disrupting the budgeting plan.

4. Managing cash flow gaps

Cash flow gaps happen when cash outflows temporarily exceed inflows. They pose a significant challenge in cash budgeting. 

These gaps can lead to

• Missed payments
• Strained supplier relationships
• abysmal day-to-day operations

Effectively managing these gaps requires proactive measures such as 

• Securing short-term financing 
• Negotiating extended payment terms 
• Maintaining a cash reserve for emergencies

Addressing these gaps ensures the business remains financially resilient despite periodic imbalances.

Overcoming these challenges requires the implementation of best practices. It is a proactive approach to ensure the cash budget remains resilient amidst organizational complexities.

Read More: Cash Flow Problems- 4 Best Ways to Solve It

Best practices for effective cash budgeting

Best practices in cash budgeting are strategic approaches adopted to emphasize efficiency, accuracy, and adaptability in your business. It involves creating budgets based on realistic assumptions and conservative estimates.

The following best practices help to maintain a pulse on your cash flows and maintain financial stability and resilience. 

1. Regular monitoring and updates

Frequent monitoring of cash flows is essential. Comparing the budget to actuals periodically will help make variance analysis part of cash reporting practices.

It can highlight opportunities for 

• Optimizing cash flow
• Identifying spending patterns
• Uncovering growth limitations within your business

Regularly updating the budget ensures it remains aligned with the actual financial trajectory of the business. This practice allows for timely updates, ensuring the budget stays realistic and adaptable.

2. Conservative assumptions

Adopting conservative assumptions when estimating revenues and forecasting expenses can act as a buffer against unexpected financial challenges. It’s prudent to be cautious, ensuring that the budget doesn’t rely overly on optimistic projections, promoting financial stability.

3. Emergency funds and contingency planning

Setting aside emergency funds within the budget is a safety net during unforeseen circumstances. A contingency plan enables the business to respond swiftly to unexpected events, preventing disruptions in operations and maintaining cash flow stability.

4. Utilizing financial software and tools

Leveraging advanced financial software and tools streamlines the cash budgeting process. 

These tools can 

• Automate calculations
• Generate real-time reports
• Provide insightful analyses

Utilizing technology enhances accuracy, efficiency, and the overall effectiveness of budgeting efforts.

Tools and resources for cash budgeting

The tech world provides a variety of tools to streamline the process of cash budgeting. With so many solutions, you can find the budgeting tool that best fits your business needs. Leveraging the following tools and resources can play a crucial role in developing strategies for better financial management.  

1. Spreadsheet templates

Microsoft Excel or Google Sheets, offer a customizable and cost-effective platform for cash budgeting. Businesses can create tailored budget sheets, incorporating income sources, expenses, and planned allocations. 

Spreadsheet templates enable businesses to 

• Perform calculations
• Visualize trends 
• Analyze data

However, there are more reliable and accurate options than tracking budgets manually. 

Companies that use spreadsheets for managing their budgets are more likely to make mistakes, as nearly 90% of spreadsheets contain errors. Consider budgeting apps and software.

2. Budgeting apps and software

Budgeting apps and software offer user-friendly digital solutions to simplify cash budgeting.  They provide user interfaces to

• Create cash budgets
• Import data from other budget spreadsheets
• Monitor cash flows in real-time 
• Expense management
• Report and compare actuals versus budget
• Make budget adjustments

These apps can also provide detailed financial reports and graphs, aiding businesses in visualizing their cash positions effortlessly. Opting for software with integrations and automatic import can improve efficiency and save time and payroll costs.

3. Financial advisors

Financial advisors can be helpful resources with their invaluable expertise. These professionals offer customized guidance based on your business’s financial goals and challenges. 

Financial advisors 

• Analyze the cash flow patterns
• Identify potential areas for improvement
• Provide tips to create budgets that can help achieve short and long-term goals
• Suggest strategies to optimize the budget effectively

Their insights and recommendations are instrumental in making informed financial decisions, ensuring the cash budget aligns with the organization’s long-term objectives.

An example of a cash budget demonstrating its working will provide a clearer understanding. 

Must Read: Best Cash Flow Management Software

Example illustrating the working of a cash budget in a business

Let us now look at an example to demonstrate the implementation of cash budgeting in a small business. 

 Sunny’s Bakery – Cash Budget for January, February, and March

“If you fail to plan, then you plan to fail.” 

A strong planning strategy should include developing a cash budget. 

A well-structured cash budget is the only effective tool for understanding your cash flow. Whether a business is a small startup or a large enterprise, one universal trait all successful businesses share is their reliance on a comprehensive cash budget. Even exceptional sales performance holds little value without efficient cash flow balance management. 

By crafting realistic budgets, continuously monitoring financial activities, and making timely adjustments, businesses can navigate the unpredictable risks of economic challenges, unexpected expenses, and varying sales patterns.

Must Read: Happay’s Expense Management software

A cash budget is a financial tool that outlines a company’s expected cash inflows and outflows over a specific period. It helps businesses manage their liquidity by forecasting the money available to meet their financial obligations.

The key components of a cash budget include projected  Cash inflows from sales, investments, and other income sources Cash outflows for expenses, investments, debt repayments, and taxes,  ensuring a detailed overview of a business’s expected cash position.

Businesses estimate cash inflows by analyzing past sales data, market trends, customer behavior, and sales forecasts and expected customer payments.

Typical cash outflows in a cash budget include  Operational expenses such as salaries, utilities, and inventory Capital expenditures Debt repayments  Taxes

Common budgeting techniques for cash budgets include  zero-based budgeting incremental budgeting  activity-based budgeting Each offers different approaches to financial planning and expenditure control.

Businesses can ensure accurate sales projections by  Analyzing historical sales data Conducting market research Considering economic indicators Incorporating input from sales teams and industry experts

Cash flow forecasting helps predict future cash inflows and outflows, providing essential data for creating a cash budget. It aids businesses in planning for financial needs, ensuring liquidity, and making informed decisions about investments and expenses.

Effective cash budgeting ensures  Financial stability Improves decision-making  Prevents cash shortages Aids in strategic planning  Enhances the overall financial health of a business

Businesses often face challenges when creating and managing a cash budget, such as, Unpredictable cash flows  Inaccurate sales projections Unexpected expenses  Difficulties in managing cash flow gaps

Businesses can create an emergency fund, implement cost-cutting measures, secure a line of credit, or negotiate payment terms with suppliers to deal with unexpected expenses or fluctuations in cash flow in their budgets.

Businesses can use specialized cash flow management tools like Float or Pulse to efficiently create and manage their cash budgets.

Businesses should update their cash budget regularly, ideally monthly or quarterly, to reflect changing financial circumstances. Regular monitoring ensures accurate financial planning, helps identify trends, and enables timely adjustments to prevent cash flow issues.

Common mistakes in cash budgeting include overlooking unexpected expenses and inaccurately estimating cash flows.  Businesses can avoid these errors by conducting thorough market research, consulting financial experts, and regularly reviewing and adjusting their budgets.

Successful businesses like Apple, Walmart, and Amazon have effectively managed their cash flow through strategic budgeting, enabling them to invest in innovation, expansion, and long-term sustainability.

Warning signs, such as consistent negative cash flow, delayed vendor payments, or difficulty meeting payroll, indicate a business needs to revise its cash budget immediately to avoid financial strain.

Cash budgeting ensures proper allocation of resources, prevents cash shortages, and enables strategic investments, fostering financial stability and long-term sustainability for businesses.

Related Posts:

• Understanding the Difference Between Cash Flow and Fund Flow
• Cash Flow Forecasting: What is it, Components,…
• Financial Planning: What is it, Types, Objectives,…
• Cash Flow: What is it, Types, How does it works,…
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What is Debt Service Coverage Ratio (DSCR) and How to Calculate it?

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Cash Budget

• What is a Cash Budget?

A Cash budget represents the expected future cash flow of an organization over a defined period of time. It is an estimate of the cash receipts expected in the future over the budget period, the expenditure to be incurred in cash, and finally, the cash balance with the company at the end of the period. However, the cash position can be ascertained more frequently, say every month, to keep a check on the company’s performance with regards to the budget. It is a type of operating budget .

In case of businesses facing seasonal variations in demand, the cash budget can be made for small durations, say weekly or monthly. This will help to achieve realistic budget goals. A company can go for a longer period budget, say even a year, if its cash flows are relatively stable with little fluctuations. The cash budget gives a broad view of the company’s cash requirements in the near future. If the receipts seem to be falling short of the future expenditure, the company can plan to raise or arrange for more cash from other sources in time. This will help it to avoid the unpleasant situation of being short in cash and hindrance of business activities.

Cash Inflow Forecast

Cash outflow forecast, cash balance forecast, example of cash budget, helpful in proper planning, helpful in tackling seasonal variations, building brand value.

One important thing to be taken into account is that a cash budget includes only the transactions where actual cash will come in or go out. For example, it will not include a credit sale for which cash or payment has not yet been received. Also, it does not include expenses like depreciation or amortization since no exchange of cash takes place while recording any of the two.

How is the Cash Budget Prepared?

A cash budget takes shape after the preparation of other budgets like sales, purchases, etc. These budgets give a clear picture of the cash drivers in the company and by how much. This budget mainly comprises of three parts-

Also Read: Financial Budget

This budget takes into account all the probable sources from where the company can earn cash over the budget period. These sources include cash sales, cash to be received against accounts receivables, cash to be generated from the sale of a fixed asset over the period, cash to be earned from the sale of stocks and bonds, or any other similar source. The cash balance at the beginning of the budget period will add up to the total cash inflow to give the total cash with the company over the period.

Preparing the budget will take into consideration all the probable cash outflows during the budget period. These outflows will include all the cash payments made for purchases of raw materials, inputs or semi-finished products, consumables, any cash to be paid for the purchase of a fixed asset during the period, provisions for repairs and maintenance, labor payments, selling and administrative expenses, printing, and stationery requirements, dividend distribution, etc.

The cash balance forecast is done by deduction of the total cash outflows from the cash inflows over a period of time, maybe a week or a month, as the management feels appropriate. If the budget foresees a high surplus of cash balance, the management may use it appropriately by preparing a financing budget. It becomes the basis for deciding suitable investments for the company. The management may decide to invest in land, plant, and machinery, invest in some other fixed asset, or may allocate the surplus funds to other functions within the organization as per need.

In case the cash balance thus calculated seems to be marginal or deficient of the actual cash requirement of the company, the management may take actions accordingly. They will have to look for other sources of raising capital. Or they may have to increase the borrowings from the bank, or cut down on unnecessary expenditure or delay it.

Also Read: Types of Budget

Let us look at an example of a cash budget for a period of one month for ABC manufacturing Pvt.Ltd. Its cash balance at the beginning of the budget period is US$ 20000. The cash inflows forecasted over the month are Sales amounting to US$10000, Accounts receivables collections to the tune of US$75000, and a fixed asset sale of US$45000. Hence, the total cash with it over the period will be US$ 150000.

Its cash outflows forecast consists of payments for materials amounting to US$ 25000, labor payments amounting to US$20000, selling expenses of US$10000, printing expenses of US$5000, repairs and maintenance activities of US$10000, and asset purchase of US$30000. Hence, the total outflow forecast amounts to US$ 100000.

Therefore, the cash balance at the end of the budgeted period will be US$ 50000 (US$  150000 – US$100000). We see that the closing balance of cash with the company is more than the opening balance. The management may decide to use the surplus cash for its proposed activities from the financing budget. It may decide to pay dividends in near future to its shareholders. Or it may just sit over it to use it in the future.

Importance of Cash Budget

The cash budget helps the management in proper planning. It will know in advance the possible cash surplus or deficit scenario in near future. In both cases, it can stay prepared in advance to avoid sudden crisis or loss of investment opportunity. A consistent surplus budget may signal the management to look for other investment opportunities. It can also decide to raise the scale of its own operations.

On the other hand, a cash deficit situation can alert it to take care of its expenditures. Also, it can timely arrange funds by way of equity or debt. Banks are unwilling to extend loans on very short notice or may charge extra interest on the same. Management may avoid such a situation by taking action in time. Thus, it will lead to the efficient utilization of its scarce resources.

A cash budget may be overall positive. But it may still show cash deficits in certain months or periods due to the seasonal nature of businesses. The management can carefully draft plans to tackle these seasonal variations in advance. Proposed cash outflows can be timely curtailed or avoided for periods of stress or low sales. It will help the company to prevent cash shortage.

Moreover, managers can know in advance the periods with a cash surplus. Sitting over idle cash can lead to a waste of an investment opportunity. It can result in missing out on handsome profits for the company. Also, the management may plan to repay part of its debt and reduce its interest burden during periods with a cash surplus.

A cash budget acts as a tool to correctly time expenditures of the company as per its cash resources. Also, as said earlier, it gives the management time to be prepared for utilizing surplus cash when available. It helps in timely payment for materials to suppliers, early repayment of the debt, timely disbursement of salaries, proper streamlining of production activities to ensure timely deliveries to customers, etc. This results in building goodwill and brand value of the business. This in turn helps the company to grow and increase its profitability.

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• Process of Capital Budgeting
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• Why is Budgeting Important?

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Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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Create and track a cash budget (step-by-step guide)

Budgeting & forecasting.

Updated: May 15, 2024 |

Head of Pre-Sales & Solutions, Cube Software

Jim Bullis has over 13 years of experience implementing CPM/EPM tools and other finance software, as well as consulting and supporting a wide range of clients from Fortune 500 organizations, to privately held corporations generating over $100M in revenue, to public sector entities.

Keeping an eye on the cash movement through the business is key to ensuring healthy financials and business success.

Your cash position helps determine the company’s ability to keep things running smoothly, buy materials for production, and pay your people. 

How do you know you have enough cash in the bank for upcoming costs out of the accounts payable (AP)?

It’s called cash budgeting.

When you build and analyze a cash budget, you can see future cash flow issues before they become an issue.

It can provide the data to successfully navigate changes in the business or in the market.

Today, we’ll cover the basics of this essential accounting practice.

Get out of the data entry weeds and into the strategy.

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What is a cash budget?

A cash budget is an important tool for tracking cash inflows and outflows to manage a company's cash flow .

It estimates cash needs for a specified budget period in the future, anywhere from weeks to months or quarters.

The budget allows you to estimate your expected cash balances at the end of your budget period.

This lets companies better manage their cash and avoid shortfalls throughout the fiscal year.

The cash budget is usually the result of a cash forecasting exercise. 

Why is the cash budget important?

The cash budget is important because tracking a company's cash flow is essential for its future.

One example is financial reporting with regard to funding or mergers & acquisitions. 

Investors or potential buyers will use liquidity ratios like the operating cash ratio to determine how stable an investment the company is.

The great thing about the cash budget is that it helps you plan to position yourself well.

Another example? Managing your cash runway . If you know that summer tends to be slow, you can adjust your cash budget so that your runway depletion rate is consistent with the amount of cash coming in. 

Types of cash budgeting

Companies use cash budgeting for different purposes.

In some cases, the finance department wants a snapshot of the company’s cash position to help make decisions about planning within the week, month, or quarter.

Longer-term planning , like a half-year or annual plan, helps the company plan larger initiatives and outline more complex financial goals. 

Short-term cash budget

A short-term cash budget is a great tool when you need an overview of the company's financial situation over the next weeks or months.

When making a short-term cash budget, FP&A considers near-future expenses like bills, payroll, payments to suppliers , investments, and other operating or capital expenses .

By predicting the income and expenses over a period of time, the company can determine how much money it'll have on hand. This helps them plan accordingly.

Short-term budgets are also helpful in creating projections for investors or banks when requesting loans. 

Long-term cash budget

The long-term cash budget projects income and expenses across multiple quarters or years. It's good to do in conjunction with long-range planning.

A typical long-term cash budget will look at moderately predictable items like rent or loan payments every month and one-off expenditures such as repairs or investments.

It's a valuable resource, allowing you to predict future changes in income, debt, or other resources. 

Long-term cash budgeting is more complex than a short-term review. Financial planners may use what-if scenario analysis to examine different likely scenarios when preparing a long-term cash budget.

Six steps to build a cash budget

Building a cash budget is relatively simple. The basic formula for estimating your cash budget is: 

Beginning cash balance + Cash inflows - Cash outflows = Ending cash balance

With that in mind, here's how to build a cash budget:

1. Create a template

Build a simple spreadsheet to help calculate your cash budget using the steps below.

The template should be simple enough to track cash movement over time, with correct calculations for the future impact of the current cash position.

2. Establish your budget timeline

Create a spreadsheet with columns for the itemized inflows and outflows for each increment in your budget period. For instance, if examining a Q1 cash budget, add columns for January, February, and March.

3. Input your opening cash balance

Document the cash available at the beginning of the reporting period.  

4. List your cash inflows and outflows

Be sure to list all sources of money coming into the business, as well as any going out, such as: 

• Revenue and credit sales
• Accounts receivable 
• Loan interest payments
• Leasing payments
• Office rent
• General and administrative expenses
• Other cash payments

5. Estimate the cash inflow or outflow

Document each item's estimated inflow or outflow across each increment in your time period. 

6. Calculate the budget

Calculate the net sum of the expected cash receipts and outflows through the month using the formula above. If the final result is a positive number, well done!—you have some extra money in the budget after all inflows and outflows are accounted for. If not, read the section below for strategies to resolve the negative cash flow issue. 

Check your calculations for accuracy, and conduct any what-if analysis necessary to make future decisions that balance cash usage against short-term liabilities and obligations. 

Seven options for overcoming a negative cash budget 

You have a cash shortfall if you spend more than you plan to receive.

The first thing to know: it’s not yet time to panic. Double-check your numbers.

If the shortfall isn’t the result of a calculation error, you have several options to resolve it: 

1. Improve your accounts receivable turnover ratio

Your cash position suffers if customers aren’t paying on time .

The accounts receivable turnover ratio tells you how many days, on average, you wait to get paid. 

Check-in with any outstanding AR accounts to facilitate payment of overdue invoices. 

2. Tighten repayment terms

Though this won’t solve the immediate problem of a cash shortfall, tightening your repayment terms gets money in the door faster.

Getting paid on a tighter timeline can avoid or remedy a cash shortfall.

3. Increase your sales revenue

Driving sales activity naturally increases financial performance by bringing more revenue into the organization.

Look for ways to increase the volume and reduce the sales cycle of the sales team to improve cash positioning.

It's worth revisiting pricing, too, although that's usually not a viable short-term fix.

Of course, you must be mindful of cutting your selling expenses, too—think of ways to make sales and marketing more efficient .

4. Consider factoring

A factoring service assumes the liability for a debt in exchange for a small fee (usually 10-15%).

Consider handing off the overdue accounts to a factoring service for difficult invoice collection.

The small profit cut often outweighs the potential for never seeing the return. 

5. Cut cash expenses

The fastest way to remedy a shortfall is to keep more money in the business.

A prime way to accomplish this is to halt unneeded or ancillary expenses, such as with a method like zero-based budgeting .

Be sure every expense has a solid rationale.

6. Reduce the cost of sales

Streamlining the production process and reducing the cost of materials (COGS) reduces the overall product price, leaving more revenue intact to bolster the cash position.

Of course, there are other ways to reduce CAC , like experimenting with shorter sales cycles or more efficient marketing methods.

7. Negotiate with vendors

Cash shortfalls happen. Reach out to vendors with whom you have a strong relationship. Explore ways to stretch your cash by negotiating better repayment terms.

The above methods can quickly stabilize your financial situation and ensure you have enough cash to sustain operations until the shortfall is resolved. 

Last resort: adjust your headcount

Nobody ever wants to lay off employees.

But when times are tight, sometimes it's a necessary evil if the company is going to survive.

This kind of workforce planning is best done with care, meaning you might want to look into special software to help you.

What impacts the cash budget? 

Shifts in the economic landscape can greatly impact cash budgets.

The following scenarios make monitoring and understanding your cash budget important to avoid creating a cash shortfall. 

Materials pricing

Changing economic conditions drive up the price of materials used in manufacturing.

Monitoring cash budgets also creates an opportunity to detect and react to changes in the supplier market that drive up pricing.

Fixed and variable overhead costs often represent a large portion of the budget.

They’re also common culprits for creating unintended cash shortfalls.

Maintaining tight budgetary controls on overhead spend and incidentals improves cash budgeting and ensures more money stays in the business to help it grow.

Audit your capital expenditures and operating expenses .

Labor and wages

As companies scale, the price of labor increases as the organization adds a larger pool of qualified workers to its ranks. 

You can use headcount forecasting to get a good idea of how labor and wages will impact the cash budget in the future. 

Sales actuals

A reduction of actual versus estimated sales changes the amount of money flowing into the business. 

Sales forecasting is a good practice to ensure you're not caught off-guard. 

Cash inflows from loans effectively stretch the use of cash within the organization.

However, this must be balanced against the longer-term loan repayment and interest prospect.

Applying for a loan should be low on the list of fixes you attempt. 

Best practices for using a cash budget

The key to tracking cash outflows is consistency.

Use the following practices when building and monitoring the cash budget for your business: 

Compare budget to actuals

Estimations in performance must be accurate to be valuable. Make variance analysis part of your cash reporting practices.

Doing so may reveal opportunities to change your operations for better cash optimization or show cash receipt patterns or expenditure-limiting growth opportunities. 

(PS - We have a free budget vs. actuals Excel template you can use.)

Make cash budget reporting routine

Ad hoc reporting highlights critical issues when needed, but long-term, systematic monitoring of the cash budget can surface issues before they reach a critical stage.

Build a regular reporting cadence for cash position, and you'll never be caught by surprise. 

Plan for a rainy day

Cash budgets are a tool used to signal upcoming issues in cash position. They provide a snapshot of performance.

But the more proactive solution is creating plans for shortfalls and cash surpluses.

Establish guidelines for dealing with each scenario to balance growth opportunities against the realities of the fluctuating market and internal conditions.

Your cash budget should include your contribution margin . 

Use technology to make tracking easier

While smaller companies may be able to perform manual cash budgeting, the added complexity of growth makes it more practical to use technology in your tracking.

Implementing a financial planning and analysis (FP&A) platform can tie together the information from your accounting software and enable fast and automated cash reporting.

This helps finance keep an eye on changes and trends without reinventing the wheel.

Conclusion: Track your cash budgets faster with Cube

These days, sticking to your cash budget requires software.

Using technology to track and monitor expenditures results in more accurate and timely reporting and stronger outcomes.

Cube makes it easy to perform this and every FP&A calculation using an Excel-native platform that unites fast and accurate reporting with the familiarity of spreadsheets. 

Want to find out more? Request a demo of Cube today. 

Related Articles

Cash runway: How (and why) to calculate your company’s cash runway

Feel the burn: a guide to gross burn vs. net burn

Cash inflow and outflow: keeping tabs on your financial health

Module 9: Operating Budgets

Cash budget, learning outcomes.

• Create a cash budget

The cash budget will look a lot like a budget you would do for your personal budget. It includes income and expenses, as well as any cash overages or deficiencies. If you borrow money to purchase equipment you may also have a financing section. In your personal budget, this would be things like mortgages and car loans.

Hupana Running Company doesn’t have any outstanding loans, so we don’t need to worry about that section, but just be aware that it might exist. There also may be instances where a company has a short term cash flow issue. This can occur when a huge production run may be needed prior to a big selling season. So, if Hupana needed to make 1000 pair of shoes in October for December sales, they may run short of operating cash due to needing to bring in raw materials, labor and the other manufacturing costs prior to receiving the income for the shoes.

When this happens, it is possible to take out what is called a working capital line of credit to cover those short term shortfalls of cash. These are typically very short term notes, where the money is used to pay expenses until the revenue comes from the sales and then immediately repaid. Unlike a mortgage or equipment loan with set monthly payments, these short term notes can be paid off quickly with large payments. They are helpful to even out cash flow.

So back to our cash budget. We are going to need a bunch of information from our previous work to complete this one! If you haven’t already, you might want to either print those prior budgets or have them pulled up in multiple tabs. It will make it much easier to find the information you need!

Practice Questions

• Cash Budget. Authored by : Freedom Learning Group. Provided by : Lumen Learning. License : CC BY: Attribution

Cash Budget Template

A budget based on actual inflows and outflows of cash

What is a Cash Budget Template?

A cash budget template is a budget based on actual inflows and outflows of cash, as opposed to being based on accounting principles such as revenue recognition , matching, and accruals, which may result in very different numbers. A cash budget is important for personal and business planning , as it indicates how much funding is required or how much surplus cash is produced over a period of time.

Example of a Cash Budget Template

Below is an example of a generic monthly cash budget template in Excel that you can download and use for your own purposes.

The template includes several sections:

• Cash in from the sale of goods/services
• Cash out for expenses
• Cash in/out for investing
• Cash in/out from financing
• Total change in cash in each period

How to Use the Cash Budget Template

In order to make the template work for you, you’ll need to make several changes to it.  The first thing is to add your company name and change the dates or time periods as appropriate.

Next, change the names of all the sources of inflows/outflows of cash in the operation section and add or remove rows as necessary.  Make sure the totals sum up correctly after making the changes.

Following that, add any investing and finance cash flows as appropriate.  A common approach is to leave financing until the end and decide if any is required if excess cash may be returned to investors.

Finally, look at the net figures in the final row called “total increase/decrease in cash” and analyze your cash budget.  You may decide expenses should be increased or decreased and other changes are required to optimize the budget for your company.

Note: The cash budget template is for educational purposes only and should not be relied upon without professional advice.

Pros and Cons of a Cash Budget

There are several advantages and disadvantages in preparing a budget on a cash basis.  Here are some key pros and cons:

• Provides precise timing of when cash comes in and out of the company
• Gives a clear picture of the net financial position of the business
• Challenging to get details about when cash will be received for revenue and when each bill will be paid
• Doesn’t tie exactly to the income statement

In a perfect world, a financial analyst would prepare an operating budget, a capital budget, and tie everything together in a fully-linked three-statement financial model .

Download the Free Template

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Additional Resources

Operating Budget Template

How to Link the 3 Statements

DCF Modeling Guide

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A company needs to produce a cash budget in order to ensure that there is enough cash within the business to achieve the operational levels set by the functional budgets

Consider the following sales figures for a newly formed company that makes metal boxes:

These figures are based on orders that customers have already placed with the company after considerable hard work by the sales team. However, sales revenues do not necessarily equal cash inflow. In order to secure the orders the sales team had to negotiate payment terms with the customers. Only 10% of customers agreed to pay immediately for the metal boxes. Of the remaining customers, 60% agreed to pay after one month and 40% after two months. Within the metal box industry it is known that 2% of credit customers never pay (because they go out of business or dispute the invoices) the metal box company has made the decision to reduce the budgeted cash inflow from the credit customers who should pay after two months to reflect this fact (making the percentage who pay after two month 38%). Once the metal box company knows these payment terms and the estimated irrecoverable debt it can produce a cash inflow budget from the sales budget as follows:

W1 Of the $300 total January sales, $30 pay cash immediately therefore $270 are credit sales (no cash in for at least one month) of this $270, 60% will be received one month later, ie in February and 38% two months later, ie in March. Remember the 2% irrecoverable debt will never be cash flow.

So now the company can see that while the sales revenues figures may be healthy there is a delay between making the sale and receiving the cash. Why does this matter? It matters if the company needs to pay cash out in order to keep trading. For example, expenses such as labour, materials and overheads may have to be paid out before the cash from the sales arrives. This can lead to serious liquidity issues if not managed properly.

If the metal box company has a labour cost equal to 20% of the sales value a materials cost equal to 25% of the sales value and an overhead cost equal to 15% of the sales value, then the functional budget would be as follows:

The company can see that there is a 40% gross profit margin, which is considered good for the metal box industry but a healthy profit does not necessarily mean a healthy cash flow.

Consider that labour is paid weekly one week in arrears and that there are four weeks in both January and February and five weeks in March. The cash outflow for labour would be:

The material supplier will not allow the metal box company any credit as because it is a newly formed company, it has no track record of paying its debts. The supplier of materials is also aware that new companies often fail and go out of business thus creating irrecoverable debt. Therefore, the supplier is insisting on cash at time of delivery for all materials purchased. However, the metal box company has to buy the materials before they can be made into boxes (therefore the material purchase budget differs from the material usage budget). Half of the materials required for production must be purchased and paid for in the month prior to sale the other 50% can be purchased and paid for in the month that the metal boxes are manufactured and sold. Thus, the cash outflow for material purchases would be:

Now let us consider the overhead. Overhead is paid for in the month in which it is incurred. Included in the overhead figures above is a $10,000 monthly charge for depreciation. Depreciation is a non-cash item and should not be included in the cash flow. The company will pay cash out when the non-current asset is purchased and may receive cash when the non-current asset is sold, but depreciation is a book adjustment in the accounts and is not a cash flow that has to be paid out. Therefore, the cash outflow for overheads is:

The metal box company can now put all of the elements of the cash budget together. We will consider the first three months of trading only. At the start of January the metal box company will have $150,000 cash in the current account.

What use is the cash budget?

The metal boxes company now knows that although both the sales forecast and profit margin are healthy during the first three months, in February it will suffer a cash deficit. The company directors can now consider in advance, how this deficit can be financed. In March the company will have quite a substantial cash surplus and the directors will consider investing this cash to maximise the benefit to the company. For example, if the company needed to buy a $60,000 non-current asset during the first three months it would ensure that it could be paid for in March and not February.

The cash budget can also be used to help prepare the budgeted statement of financial position, part of the company’s master budget. We already know that the cash balance is budgeted to be $94,000 at the end of the first quarter’s trading but the metal box company can also calculate the material inventory, trade receivables and trade payables closing balances. A proportion of materials are purchased before they are required for manufacture and therefore there will be a material inventory at the end of March equal to 50% of April’s sales requirements. If April’s sales are forecast to be $700,000 then the material inventory will be $87,500 ($700,000 x 0.25 x 0.50). Receivables at the end of March are expected to be $621,900 ($136,800 still due from February’s sales plus $297,000 and $188,100 due from March sales) the trade payables will be zero as the company pays cash for all of the purchases.

Finally the cash budget can be used to monitor and assess performance. If the metal box company has $780,000 of outstanding receivables at the end of March as compared to the $621,900 that was budgeted, then this would indicate that customers were taking longer to pay than their agreed terms (assuming that the sales revenues were as budgeted) this in turn may indicate that the person responsible for collecting the debt are less efficient than they should be.

Written by a member of the FFM examining team

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How to Prepare a Cash Budget for a New Business

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on April 04, 2023

Fact Checked

Why Trust Finance Strategists?

Table of Contents

This article shows how to build up a cash budget using the receipts and payments account .

We'll start by looking at the cash budget for a new trading organization, helping us to get a clear idea of the main principles.

We'll also see how the cash budget fits in with the budgeted profit and loss account and balance sheet .

Later on, we'll examine how to build on our technique to develop cash budgets for existing businesses by incorporating data from the opening balance sheet.

Basic Process of Preparing a Cash Budget

Linking with other budgets.

The data used to create all budgets must be consistent. This ensures that all budgets are based on the same assumptions.

We will find that much of the data needed for a cash budget can be found in a budgeted profit and loss account, if this has already been prepared.

However, the key to accurate cash budgets is to remember that receipts and payments are based on when the receipts and payments occur, and therefore most of the figures in the budgeted profit and loss account will need analyzing or modifying.

When we receive or pay cash at a different time to the recording of the sale , purchase , or expense , this is known as lagging.

It is these lagged figures—based on the time of the receipt or payment—that we will use in our cash budget.

For example, if credit sales of $10,000 were made in January on two months' credit, then the money will be received in March.

Although the sale would be recorded in the profit and loss account in January, it must appear in the March column in the cash budget.

A cash budget will not show any non-cash items that appear in the budgeted profit and loss account; the most common example of this is depreciation .

There are also items that will appear in the cash budget, but are not shown in the budgeted profit and loss account.

These are capital items (purchase or disposal of fixed assets), disbursements like drawings and tax, and exceptional items like financing ( funds from equity or loans).

The diagram below shows how the data in a simple cash budget links with the data used in other budgets.

In the case study below, we'll consider how a simple cash budget can be generated for a new business. To do so, we'll use the sources of data shown in the diagram above.

First Trade Ltd. Simple Cash Budget

Jim First is planning to start a trading business, First Trade Ltd. He has prepared the following budgeted profit and loss account for the initial four months of trading.

Jim First: Budgeted Profit & Loss Account

Jim has also provided the following information about his plans:

• Sales are made on two months' credit. The sales figures in the budgeted profit and loss account are based on monthly sales as follows:

• Purchases made in the first month must be paid for immediately. Subsequent purchases will be on one month's credit. The purchases figure in the budgeted profit and loss account is made up as follows:

• Cash expenses are based on paying out $1,000 in each of the first four months of the business.
• Equipment is to be bought for $15,000 in the first month of the business. The depreciation shown in the budgeted profit and loss account is based on depreciating these fixed assets at 20% per year on a straight-line basis.
• Jim has $25,000 to invest in the business in month 1. The business has no opening cash balance.
• Jim wishes to withdraw $2,000 from the business in month 4.

Required: Prepare a cash budget in the receipts and payments format for the first four months trading of First Trade.

The cash budget is prepared in the following way:

• First, the capital invested is entered as a receipt in month 1.
• Second, the receipts from sales are entered on the appropriate line, taking account of the two months' credit by lagging the receipts by two months (i.e., sales for months 1 and 2 are received in months 3 and 4). Note that the sales made in months 3 and 4 do not appear on this cash budget as the money will not be received until months 5 and 6.
• Third, the payments for purchases and expenses are entered into the appropriate lines, using the data on payment terms. Remember that the first month's purchases are paid for in month 1 and subsequent purchases are given one month's credit.
• Fourth, the payments for fixed assets and drawings are entered as required.
• Fifth, the receipts and payments totals are completed, and each month's cash flow is calculated (i.e., total receipts minus total payments).
• Sixth, the bank balance brought forward for month 1 is inserted (here, it is zero).
• Finally, the carried forward bank balance for each month is calculated. This is based on the calculation for each month using the following formula:

Cash flow for month + Bank balance brought forward = Bank balance carried forward

The closing bank balance (bank balance carried forward) for one month is then entered as the opening bank balance for the following month (bank balance brought forward).

The cash budget shows that if everything goes according to plan, Jim's business bank balance will be $3,000 in credit at the end of month 1, but will fall to an overdrawn balance of $2,000 by the end of month 4.

Therefore, Jim should make suitable financial arrangements if he wishes to follow this budget.

He should also consider the impact of unforeseen events (e.g., sales may be lower than forecasted and expenses may be higher).

This type of "what-if?" planning process is referred to as sensitivity analysis .

Linking Cash Budget With the Budgeted Balance Sheet

Cash budget and master budget.

A full set of budgets for an organization includes a budgeted balance sheet at the end of the budget period , as well as a budgeted profit and loss account and cash budget.

The budgeted balance sheet is based on the same format as the historical balance sheet produced for financial accounting purposes; however, is based in the future.

It is a statement of the expected assets , liabilities and capital at the end of the budgeting period.

Because this document will tie in with the other two main budgets, it incorporates the profit generated in the budgeted profit and loss account, along with the final cash or bank balance as predicted in the cash budget.

The budgeted profit and loss account and the budgeted balance sheet are together known as the master budget.

Subsidiary Budgets

Several subsidiary budgets often have to be created in more complex businesses in order to build up sufficient information to create the master budget and the budgeted cash flow statement .

Examples of subsidiary budgets include the sales budget , production budget , and materials usage budget.

Cash Budget and Budgeted Balance Sheet

To understand how cash budgets work, we need to be able to create a budgeted balance sheet either in full or in extract form.

By creating a full-budgeted balance sheet, we can also check that our budgets link together properly and that the final result balances.

Of special importance are the following links between the cash budget and the budgeted balance sheet at the end of the budget period:

• The figure for debtors in the budgeted balance sheet will represent the credit sales made that have not yet been received in cash. These are typically the sales for the final period(s) where receipts do not appear in the cash budget.
• The cash/bank figure in the budgeted balance sheet will be taken directly from the final cash/bank balance in the cash budget. If this is a negative figure, it will be recorded as an overdraft under current liabilities .
• The trade creditors figure in the budgeted balance sheet will represent the credit purchases (and possibly expenses) that were made in the budget period, but are unpaid at the period end.

Regarding the final link mentioned above, in a similar way to sales, these are typically the purchases or expenses for the final period(s) that do not appear in the cash budget.

At this point, let's return to the case study of First Trade Ltd. to see how the budgeted balance sheet can be developed in practice.

First Trade Ltd. Preparing a Budgeted Balance Sheet

As described in the first case study, Jim First is planning to start a trading business.

Jim has prepared a budgeted profit and loss account for the initial four months trading, showing a budgeted profit of $3,000. A cash budget has also been prepared that shows an overdrawn bank balance of $2,000 at the end of month 4.

Required: Prepare a budgeted balance sheet for the end of month 4.

The budgeted balance sheet is shown below. Notes are also given to show how each figure was calculated.

(1) The fixed assets were bought in month 1. They are valued at cost , less the depreciation shown in the budgeted profit and loss account (i.e., since this is also the cumulative depreciation).

(2) The stock figure is the closing stock used in the budgeted profit and loss account.

(3) The debtors figure is made up of the sales for months 3 and 4 ($5,000 + $7,000). The proceeds of these sales will not have been received within the budget period since the sales are made on 2 months' credit.

(4) The trade creditors figure is the month 4 purchases that are not due to be paid until month 5.

(5) The bank overdraft is the final closing balance on the cash budget.

(6) The budgeted profit is as recorded on the budgeted profit and loss account.

(7) The budgeted drawings are as recorded in the cash budget.

It is worthwhile to examine the above figures and notes, ensuring that you understand how the figures were arrived at.

Note that the budgeted balance sheet should balance when the data are used consistently.

How to Prepare a Cash Budget for a New Business FAQs

How do i know whether i should create a cash budget or not.

A cash budget should be prepared if the company expects to have a negative cash flow for the budget period. This means that the company will need to borrow money, or raise capital from other sources, in order to finance its operations.

How do I project my sales?

When projecting your sales, you should consider the following factors:- the current market conditions- your company’s competitive environment- the expected demand for your products or services

How do I project my expenses?

You should project your expenses by considering the following factors:- the current market conditions- your company’s competitive environment- the expected demand for your products or services- the likely changes in your costs of goods sold or operating expenses.

What if I don’t have enough information to project my sales and expenses?

If you don’t have enough information to project your sales and expenses, you should estimate them. If this is the case, you should include an explanation on your cash budget to indicate why they are estimates.

What information do I need to prepare a cash budget?

A company that monitors its cash position regularly will already have much of the information required for preparing a cash budget on hand. This information can be used to prepare a cash budget. For those that don’t monitor their cash position regularly, you should start by determining whether your business will have a negative or positive cash flow for the budget period.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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