As a business owner, you might have come across the concept of a cash budget. Cash budgets can be a useful tool for understanding your business's ability to keep operating. Keep reading for our short guide on what a cash budget is, why it is useful, advantages and disadvantages, and a cash budget example.

What is a Cash Budget?

A cash budget is a type of budget that estimates cash inflows and cash outflows of a business over a specified amount of time. Sources of cash can, for example, include bill payments, dividends on shares, and any other income from the sale of assets. Expenses, on the other hand, can include payments to creditors, payments of assets purchased, wages, rent, postage or entertainment expenses.

Your business's cash budget shows the budgeted cash receipts and cash disbursements for a future period of time. Looking at a cash budget can provide you with insight into your cash position and thereby help plan and improve future cash balances. For example, when payments exceed income, cash management can be enforced. When there is a surplus, you can make a decision about how to use and invest the amount. Cash budgets can be done for different periods, ranging from weekly to annually.

What is the main purpose of preparing a cash budget?

Your business can use a cash budget to determine whether it has sufficient cash to continue operating over the given time frame. The cash budget acts as a jumping point for the assessment of liquidity. It can also be used to inform a business owner about cash needs and any cash surplus. This can improve cash distribution and usage in the business, which explains the importance of cash budget in managerial decision-making.

A cash budget provides information on the various sources of cash receipts and the use of cash in your company, future probable receipts and payments, and any excess cash requirements and how these can be arranged. You can also use your cash budget to ensure timely payments, plan short-term repayments of eg loans, and identify surplus cash to reinvest in business growth.

What are the advantages of preparing a cash budget?

• Helps foresee and avoid cash shortages or debt: Having a better idea of cash inflows and outflows and any surplus cash can inform a better understanding of what cash is available to be spent and help you set up reserves for emergencies. This can help avoid shortages and debt.
• Avoid problems with liquidity: Cash budgets can help identify wasteful cash outflows and ways to save cash. This will overall improve your company's cash balance and liquidity.
• Improved business operations: Getting a good idea of future income and expenses can help plan for taxes. This can be important for business owners, especially if your company is required to complete and file quarterly income tax returns and make estimated tax payments.
• Preparing your balance sheet: Balance sheets are crucial documents for (small) businesses, particularly when seeking funding or a loan. Creating a monthly cash budget makes it easier to prepare this important document.
• Controlling expenses: Having a good oversight of outgoing cashflows, cash budgets help you control your business expenses better. If, for example, if your latest cash budget showed very high administrative expenses, you could look into why those have occurred and eg find more cost-efficient suppliers.

How to prepare a Cash Budget

1. Prepare your sales forecast: Prepare this by starting with historic sales figures and factoring in seasonal influences, competition, inflation, and the general state of the economy.
2. Project all cash inflows and outflows for the period: Use your current cash flow statement to produce those projections. Look at where you are currently spending and receiving money and apply this to your projections.
3. Finalize the budget: In the last step, you combine all the information collected in a spreadsheet. You’ll then be able to see the cash flow bottom line, whether it’s positive or negative.

What’s the difference between a cash flow forecast and a budget?

While a cash flow forecast looks at a month-by-month breakdown of when a business can expect the cash to be spent or received, a cash budget will show expected income and expenditure for a whole period. It does not show the bank or cash movement separately. Budgets predict profits and expenses for eg the upcoming year, the cash flow forecast, on the other hand, predicts when that translates to cash in the bank.

Cash Budget Example

Company X produces Christmas decorations. It wishes to project the seasonal sales for the last quarter of the year to get a better understanding of the company's cash position.

As a first step, Company X would look at its sales figures from the past year for the three months in question. These look as follows:

• October: GPB 30,000
• November: GPB 40,000
• December: GPB 50,000

Because the company has undertaken successful marketing campaigns and opened a second store, they are expecting a 3% rise during the first two months and a 5% rise in December compared to last year. The adjusted sales forecast would therefore look as follows:

• October: GPB 30,900
• November: GPB 41,200
• December: GPB 52,500

Company X wants to look at a cash budget specifically for December. They will have to add up all the cash inflows, including projected sales plus payments from vendors and interest payments. The total of all cash inflows is GPB 80,000, including the GPB 52,500 in projected sales.

In the next step, Company X would have to add up all cash outflows, including rent, utility payments, loan repayments, payroll, and marketing. The expenses add up to GPB 50,000. This leaves it with a cash flow budget of GPB 30,000.

Cash Budget FAQs

• Why is having a cash budget important?

Your business can use a cash budget to determine whether it has sufficient cash to continue operating over the given time frame and learn about cash needs and cash surpluses. This can improve cash distribution and usage in the business.

• What is included in a cash budget?

In short, a cash budget includes all cash inflows and outflows that your business is likely to experience during the period in question.

• What does a cash budget not include?

Some non-cash expenses are not contained in cash budgets because they do not entail a cash outlay, for example, bad debts and depreciation.