Cash Budget

Published Jan 23, 2023

Definition of Cash Budget

A cash budget is a financial plan that outlines the expected cash inflows and outflows of a business over a certain period of time. That means it is a forecast of the company’s cash position at any given point in time. It is usually prepared on a monthly or quarterly basis (i.e., short-term) and helps the company to plan for future expenses and investments.

Example

To illustrate this, let’s look at a small retail store. The owner of the store prepares a cash budget for the upcoming quarter. In the budget, he forecasts the expected cash inflows and outflows for the next three months. He estimates that he will receive USD 10,000 in sales revenue, USD 2,000 in interest income, and USD 1,000 in rent income. He also expects to pay USD 3,000 in rent, USD 2,000 in salaries, and USD 1,000 in taxes. After subtracting all expenses from the expected income, the owner finds that he will have a net cash flow of USD 5,000 for the quarter. If his net cash flow was negative, he would have to make adjustments to make sure he does not run out of money and can continue operating his business.

Why Cash Budget Matters

A cash budget is an important tool for any business. It helps the company to plan for future expenses and investments and to identify potential cash flow problems before they arise. It also allows the company to make informed decisions about how to allocate its resources and adjust its spending accordingly.

Finally, it can be used to track the company’s performance over time and to compare it to its budgeted numbers. This helps to find out if the cash is used effectively to meet the company’s goals.