Budgeting

Cash Budget

Purpose

The cash budget (cash flow forecast) shows expected cash receipts and payments each period, and the resulting opening and closing cash balance. It identifies when a business will have a cash surplus or deficit.

Format

                          Month 1  Month 2  Month 3
                             £        £        £
Receipts
  Cash sales                  X        X        X
  Credit sales (lagged)       X        X        X
  Other receipts              X        X        X
Total receipts                X        X        X

Payments
  Cash purchases             (X)      (X)      (X)
  Credit purchases (lagged)  (X)      (X)      (X)
  Expenses                   (X)      (X)      (X)
  Capital expenditure        (X)      (X)      (X)
  Drawings / dividends       (X)      (X)      (X)
Total payments               (X)      (X)      (X)

Net cash flow                 X        X        X
Opening balance               X        X        X
Closing balance               X        X        X

Key rules

• Depreciation is excluded — it is a non-cash expense; it does not involve a cash payment
• Capital expenditure is included — the full cash cost of assets is shown in the month of purchase
• Loan receipts and repayments are included — actual cash flows
• Credit sales timing — if 1 month credit, January sales appear as a receipt in February
• Credit purchases timing — if 2 months credit, January purchases are paid in March

Closing balance

Closing balance = Opening balance + Total receipts − Total payments

• Positive closing balance → cash surplus
• Negative closing balance → cash deficit (bank overdraft)

A cash deficit warns management to arrange financing in advance (overdraft, loan, delay payments, accelerate receipts).