Mastering Cash Budgeting

Cash Budget

You must have come across the term cash budget with respect to business planning. So what exactly is it and how is it prepared? Let’s find out. A cash budget is a statement prepared in advance showing the estimated cash receipts and cash disbursements for a specific future period. It shows the estimated cash inflows, estimated cash outflows, and deficit or surplus over a given budget period.

Simply put, a cash budget is "an analysis of cash flow in a business over a future-short or long period. It is a forecast of expected cash inflow and outflow."

Importance & Advantages of preparing a Cash Budget:

i. Ensuring liquidity: A cash budget ensures that cash is available in time for carrying out business activities and meeting financial obligations.

ii. Maintenance of working capital: An adequately designed cash budget helps maintain the working capital position safely by making financial arrangements to overcome a shortage of funds.

iii. Best utilization of funds: A properly drawn cash budget helps the management to use any surplus funds available in the best possible manner.

iv. Capital investment: A cash budget enables the management to plan for financing expansion, modernization of existing plants, financing new projects, etc.

v. Preparing borrowing schedule: There may be certain seasons when there is a shortage of funds for storing materials. A cash budget enables management to prepare a borrowing schedule.

vi. Preparing repayment schedule: Payments to creditors and others must be made per the schedule. A cash budget helps management to prepare repayment schedules well in advance.

vii. Planning dividend payment: A well-designed cash budget enables the management to plan for dividend payment well in advance.

Budgeting Methods: Receipts and Payments Method

This method is applicable for short-term budgeting. Forecasts of cash receipts and payments are made on the basis of functional budgets, including capital expenditure and research and development budgets.

Under this method, all the probable receipts are added to the opening balance of cash and the probable payments of the period are deducted, thus forecasting a balance of cash at the end of the period.

Steps to create a Cash budget:

1. Estimate cash inflows of the business during the period

The first step in the preparation cash budget is to determine the various cash inflows to the business during the period in which the cash budget is prepared. Cash inflows include revenue from operations, collection from receivables, etc.

2. Estimate cash outflows of the business during the period

The second step is to determine various cash outflows of the business in the form of Purchases, payments to suppliers, expenses, etc.

3. Determine the surplus or deficit of cash

The third step deals with finding the surplus or deficit of cash by taking the difference between total cash inflows and total cash outflows. If cash inflows are greater than cash outflows, it is known as a surplus.

4. Manage Deficit

If the total cash inflows are less than the total cash outflows, it is known as a deficit. It leads to the borrowing of money.

In this way, a finance manager generally prepares a cash budget periodically to know the exact cash position. It allows businesses to ensure liquidity for any given period of time.

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Mastering Cash Budgeting