What is a cash budget?
A cash budget is a forecast of cash receipts and payments for a future period. It helps a business see when cash may be plentiful or short, so managers can arrange borrowing, investment or spending controls in advance.
A cash budget is not the same as a profit statement. A business can be profitable yet still run out of cash if customers pay late or a large asset is bought outright. By listing expected receipts and payments month by month, the budget shows exactly when the bank balance might turn negative, so that action can be taken early.
Principles of preparation
- Only real cash flows are included. Depreciation, bad debts and provisions are excluded because they are not cash.
- Credit sales are received in the month of collection, not the month of sale. Credit purchases are paid in the month of payment.
- Formula: Opening balance + Total receipts − Total payments = Closing balance. The closing balance becomes next month's opening balance.
Key idea
A cash budget differs from a budgeted profit. Profit includes accrued income and depreciation; a cash budget counts only money that actually comes in and goes out, at the time it happens.
Two-month example
Example
| Jan | Feb | |
| Opening balance | 2,000 | 3,500 |
| Receipts | 8,000 | 9,000 |
| Payments | (6,500) | (10,000) |
| Closing balance | 3,500 | 2,500 |
Jan: 2,000 + 8,000 − 6,500 = 3,500. Feb: 3,500 + 9,000 − 10,000 = 2,500.
Using the cash budget
Managers read the closing balances across the months. A negative or very low balance warns that an overdraft or short-term loan may be needed, or that a large payment should be delayed. A large surplus suggests spare cash that could be invested. Because the budget is only an estimate, the actual figures are later compared with it to improve future planning.
Remember
Carry each month's closing balance forward as the next month's opening balance. Never put depreciation into a cash budget.