Cash Budget

By : Minaz Khan Mohit Tiwari Sandeep Arora

What is a cash budget?

A forecasting tool that tracks all cash receipts and cash disbursements. Done on a shorter time frame than other statements (i.e., month-by-month or even week-by week).

Why is a cash budget important?

Allows companies to predict possible cash shortages and take corrective action before a crisis occurs. Allows companies to see if large sums of excess cash are lying idlecould be put to better use.

Disregard the principles of accrual accounting when developing a cash budget:

Instead of matching EXPENSES with REVENUES in the period in which they are incurred, now we are concerned with matching CASH INFLOWS and CASH OUTFLOWS in the periods in which they are incurred. All cash items, regardless of their classification (expense, asset, fixed cost, variable cost, etc.), are accounted for in a cash budget. Non-cash items (such as amortization) never appear.

 REMEMBER: A business that is UNPROFITABLE can SURVIVE but INSOLVENCY (i.e., insufficient cash to pay debts) could mean BUSINESS FAILURE.

Uses of Cash Budgeting

Schedule timing of cash flows to: Make efficient use of cash Analyze solvency Forecast financial requirements Prioritize and plan payments of outstanding accounts Perform SENSITIVITY to plan contingency action Categorize type of financing requirements

Implications: KEY VARIABLES highlighted Constant fine tuning Not perfect

Methodology of the Cash Budget

1. Identify the nature and timing of all cash inflows. 2. Identify the nature and timing of all cash outflows. 3. Subtract outflows from inflows to get net cash flow for the period (either a surplus or deficit). 4. Add (subtract) cash flow for the period to the ending balance in cash from the previous period to get new ending balance.

Business Name

Statement name and period

Money columns representing each month of budget period

First section Expected Receipts

List all expected cash receipts

Provide a total for expected receipts for each month of the budget

Second section Expected Payments

List all expected cash payments

Provide a total for expected payments for each month of the budget

The final section details the expected Cash balance at the beginning and end of each of the budget months