What Is a Cash Budget?
Let me tell you directly: a cash budget is your estimation of a business's cash flows over a specific period, whether that's weekly, monthly, quarterly, or annually. You use it to assess if the entity has enough cash to keep operating during that time. This tool gives you insight into cash needs and any surpluses, helping you allocate cash efficiently.
How a Cash Budget Works
You create a cash budget using sales and production forecasts, along with assumptions about spending and accounts receivable collections. It's essential for checking if your company has the liquidity to continue operations; if not, you might need to raise capital through stock issuance or debt. Consider a cash roll forward: it calculates monthly inflows and outflows, using the ending balance as the next month's starting point. This lets you forecast and adjust cash needs throughout the year.
Short-Term vs. Long-Term Cash Budgets
You should view cash budgets as either short-term or long-term. Short-term ones cover weeks to months, focusing on items like utility bills, rent, payroll, supplier payments, operating expenses, and investments. Long-term budgets look at years, emphasizing quarterly and annual tax payments, capital projects, and long-term investments. These require more strategic planning since cash is committed longer. Always budget for emergencies, especially in a new business where operations aren't fully predictable. Remember, the ending balance from one period carries forward to the next.
Special Considerations
Managing your cash budget means carefully handling business growth. You want to sell more, but do it sustainably. For instance, a successful marketing campaign might spike demand, but if you're not ready—with machinery, employees, or suppliers—you'll face unhappy customers. Building capacity requires cash or financing; without it, you can't proceed. So, manage sales and expenses to achieve optimal cash flow.
Example of a Cash Budget
Take ABC Clothing, which makes shoes and estimates $300,000 in sales for June, July, and August at $60 per pair, meaning 5,000 pairs monthly. They forecast 80% of cash collected the following month and 20% two months later. July starts with $20,000 cash, plus $240,000 from June sales (80% of $300,000) and $100,000 from earlier sales. For expenses, they need to produce 4,000 pairs in July (after 1,000 in inventory) at $50 each, costing $200,000, plus $60,000 in other costs. Total inflows: $360,000. Outflows: $260,000. Ending balance: $100,000.
Cash Budget FAQs
- What Are the Steps of Creating a Cash Budget? First, establish forecasts of cash inflows and outflows—predictable ones like rent and payroll, variable ones like sales. Then prepare the budget accounting for all expected flows.
- What Expenses Should Be Included in a Cash Budget? Include expected cash flows like revenue, and outflows for returns, payroll, rent, utilities, supplies, and other business costs.
- How Do You Prepare a Cash Budget? It depends on the timeframe: short-term covers day-to-day operations; longer ones include equipment, investments, and taxes. Surplus from one period starts the next.
Other articles for you
The Defensive Interval Ratio (DIR) measures how many days a company can operate using only its liquid assets without needing external funds or noncurrent assets.
Online banking allows you to manage your finances digitally from anywhere with internet access, offering convenience but with some limitations and security considerations.
Deregulation involves reducing or eliminating government oversight in industries to foster competition and growth, though it carries risks to consumers and the environment.
Upside refers to the potential increase in value of investments, contrasting with downside, and is analyzed through fundamental and technical methods to guide investment decisions.
Autocorrelation measures the similarity between a time series and its lagged version over successive intervals.
This text provides an overview of company profiles, exploring how major corporations build empires, their business models, and related financial concepts through articles, FAQs, and key terms.
A fund of funds invests in multiple other funds to offer diversification and expert management but often involves higher fees and complexity.
Effective Gross Income (EGI) measures a rental property's realistic income by adjusting potential gross rental income for vacancies, credit losses, and adding other income sources.
A highly leveraged transaction is a risky bank loan to a heavily indebted company, often used for buyouts or acquisitions, offering high interest but with significant default risks.
Uncle Sam is a personification of the U.S