Cash BudgetDefined with Formula, Examples, Statement & More!

Written By:
Lisa Borga

What is a Cash Budget?

A cash budget is used by businesses to estimate their projected cash inflows and outflows for a specified period of time.

The budget could cover weeks, months, quarters, or years.

The cash budget is intended to supply the business with information about the cash it needs for a given period, thus helping it to effectively allocate its cash.

Using a Cash Budget

Estimates of production and sales, along with assumptions about accounts receivable collections and spending, are necessary parts of creating a cash budget, and a cash budget is essential for ensuring that a business has sufficient cash to operate.

Should a company not have sufficient cash for operations, it would need to borrow money or issue stock.

A cash roll forward takes the cash outflows and the cash inflows for the month and then uses the ending balance for the next month’s beginning balance.

Doing this permits a business to predict the need for cash in the course of the year and permits a business to roll forward and adjust cash balances for all future months.

Short-Term Cash Budget vs. Long-Term Cash Budget

Cash budgets can be made for short-term or long-term use.

Short-term cash budgets are typically made to consider the cash needed in the next few weeks or months.

In contrast, long-term cash budgets look at the cash a business will need over the next year or more.

Short-term cash budgets generally consider things like rent, utility bills, payments to suppliers, payroll, as well as investments, and other operating expenses.

Long-term cash budgets look at capital expenditure projects, long-term investments, and tax payments.

These budgets generally take more planning and analysis as they may involve projects or investments that will use a portion of the business’s cash over a long period of time.

While making short-term and long-term cash budgets, a business should budget some cash for unplanned needs that may occur or even an emergency.

This is particularly important for new businesses.

These businesses may not have everything set up yet and face significant unplanned expenses.

Important Considerations

In order to effectively manage a cash budget, it is essential to do a good job of directing the growth of a business.

Most businesses are going to want to grow, but it is important to grow in a sustainable manner.

Otherwise, a business could find itself growing faster than it is ready for.

A business with a sudden large increase in demand may not have the production capabilities or employees to meet the increased demand.

The business may even have difficulty obtaining the necessary raw materials.

For whatever reason, if the business is unable to meet the demand, it is likely to result in unhappy customers.

A business should make sure it has everything it needs to meet demand; however, without sufficient cash or financing, it will be unable to do this.

As a result, it is crucial to manage both sales and expenses in order to reach a healthy cash flow.

Cash Budget Example

An example of cash budgeting would be the one created for Tea Time Coats.

This company manufactures luxury coats for girls.

The company’s sales for October, November, and December were $900,000.

Each coat has a retail price of $100, and the company expects to sell 3,000 coats per month.

Tea Time Coats expects it will receive 70% of the cash it is owed for the coats the month after the sales are made and 30% of the cash the second month following the sale.

Tea Time Coats started the month of October with a cash balance of $50,000.

Tea Time Coats expects to collect 70% of the cash from their sales for October in November, which would be $210,000.

Then, the remaining 30% of the cash from sales will be collected in December.

The company also estimates cash inflows of $47,000 from previous sales during the year.

Tea Time Coats also computed the costs of producing the coats necessary to meet customer demand.

Tea Time Coats predicts there will be 600 coats in inventory at the beginning of November.

This means Tea Time Coats will need to produce 2,400 more coats. It costs $70 to produce one coat, and the company is producing 2,400 coats.

This means the manufacturing cost or cost of goods sold is $168,000 (70 * 2400).

The company also expects to spend $40,000 on costs other than production costs.

TeaTime Coats calculated the cash inflows for November by adding the money collected from sales in October, plus money collected from earlier sales to the beginning balance for October ($210,000 + $47,000 + $50,000).

This results in a total cash inflow of $307,000.

Next, the cost of production of $168,000 along with other expenses of $40,000, or cash outflows, are subtracted from the cash inflows.

This would be $307,000 – ($168,000 + $40.000), which results in a cash balance at the end of November of $99,000.

Key Highlights

• A cash budget details a company’s estimates of what its cash outflows and inflows will be over a specified time period, such as quarterly, monthly, weekly or yearly.
• A cash budget will help give a business a better understanding of its cash requirements as well as any surpluses, which can help the business develop an understanding of how to use its cash effectively.
• Businesses need to adequately manage both their expenses and sales in order to achieve an ideal cash flow.
• A cash budget may be short-term, such as months or weeks, or long-term, such as years.
• A business uses a cash budget to ascertain whether or not it has enough cash to keep operating during a specified time period.

Learn about other Types of Budgets here.