What is cash budgeting?

Cash budgeting means a company figures out its future cash coming in and going out. The company guesses how much money it will earn and spend during specific time periods ahead. This could be each month for the next year.

Why companies do cash budgeting

Companies do cash budgeting to get an idea of their cash situation in the future. They want to know if they will have enough money coming in to pay for everything. If a company sees it might run low on cash, it can plan ahead to get loans or other money to cover costs.

What cash budgeting shows

Cash budgeting paints a picture of how a business gets cash and what it does with that money. The budget shows if the company may need to borrow money for a short time to pay bills before more cash comes in.

Parts of a cash budget

A typical cash budget has a few main parts:

Expected cash from sales

One key part is the money the company thinks it will get from selling stuff to customers. The company uses its sales predictions to guess this amount. It looks at when it expects to actually receive the payments from customers.

Expected cash going out

Another major section is all the cash the company will need to spend. This includes:

Supplies and inventory

Money to buy materials or products the company will sell.

Salaries and wages

Cash needed to pay employees for their work.

Other bills

Rent, utilities, taxes, loan payments and other costs of running the business.

How cash budgeting helps

Measures performance

The cash budget sets goals. Later, the actual results can be compared to the budget. This shows how well the company did at sales, investing money, collecting bills, and paying its own bills on time.

Shows money issues early

Most importantly, the cash budget warns the company if it might run out of money. The budget predicts if the business needs to get a short-term loan, delay some payments, or speed up collecting money from customers. By planning ahead, the company avoids a sudden cash emergency.

Helps get loans

Bankers and other lenders often want to see a cash budget. It shows the company has a realistic plan to pay back loans. A good budget makes it easier to borrow money when needed.

Timing of cash flows

The timing of when cash comes in and goes out is a big deal in budgeting. Sales might be high, but if customers don’t pay quickly, the company can still run short. The budget has to match up the timing of cash received with the timing of bills that must be paid.

Cash vs. profits

There’s an important difference between cash and profits. A business can make big profits but have no cash if the money is all tied up in inventory or unpaid customer bills. Cash budgeting focuses just on actual money changing hands, not the overall profitability.

Staying flexible

Handling the unexpected

Of course, unexpected things will happen to mess up the budget. An important customer might pay late or sales could suddenly drop. The company has to be ready to adjust spending quickly.

Updating often

Most companies update their cash budget every month. They compare the predictions with actual money that came in and went out. Then they make changes to the budget going forward. It’s an ongoing process to keep the company’s cash flow on track.

Making the budget

Who does it

In a small company, the owner or top financial person typically creates the cash budget. Bigger businesses may have a budget committee with people from sales, production, human resources and other key areas all giving input.

Reasonable predictions

The key is to not be overly optimistic. Wishful thinking about sales growth can lead to a useless budget and cash shortfalls. Conservative estimates work better. Many companies use a best case, worst case and most likely case budget to cover different possibilities.

Format

The budget is usually a spreadsheet covering each month for the next year. Further out, it may just predict cash by quarter or year. The top section shows the beginning cash, cash coming in, and the total available cash. The next part has all the cash going out. The bottom line is the ending cash position each period.