Definition
A cash budget is a forward-looking estimate of a company’s cash receipts and cash payments over a defined period (week, month, quarter, or year). It shows whether the business will have enough liquid funds to meet obligations and where surpluses or shortages may appear.
Why a cash budget matters
– Tests liquidity: helps determine if the business can pay bills and keep operating.
– Guides financing: shortfalls signal the need for loans, equity, or slower growth.
– Prioritizes spending: helps decide when to delay or accelerate expenses or investments.
– Supports planning: integrates sales, collections, production, and capital plans.
Key terms (brief)
– Liquidity: ability to meet short-term obligations with cash or assets easily converted to cash.
– Accounts receivable: money owed by customers for sales made on credit.
– Cost of goods sold (COGS): direct production costs tied to goods sold.
– Capital expenditures (capex): cash spent to buy or upgrade long‑lived assets (machinery, buildings).
Short-term vs long-term cash budgets
– Short-term (days to months): focuses on operational cash needs—payroll, rent, utilities, supplier payments, and short-term investments.
– Long-term (year to several years): includes tax obligations, major capex, large financing schedules and strategic investments. Longer horizons require deeper assumptions and may tie up cash for extended periods.
How a cash roll-forward works
A cash roll-forward takes the ending cash balance from one period and uses it as the beginning balance of the next. Repeating this monthly (or weekly) shows how cash evolves and how an event today affects future months.
Basic formula
Ending cash balance = Beginning cash balance + Cash collections (inflows) − Cash disbursements (outflows)
Step-by-step: how to prepare a cash budget
1. Choose the period and granularity (weekly, monthly).
2. Forecast sales and the timing of collections (e.g., % collected next month).
3. List predictable cash outflows: payroll, rent, utilities, supplier payments, interest, taxes, insurance.
4. Estimate variable outflows: production costs, returns, seasonal spending.
5. Schedule capital expenditures and debt service separately for long-term plans.
6. Compute the monthly cash roll-forward using the formula above.
7. Compare projected ending balances to a minimum cash requirement (a buffer).
8. Plan financing actions if projected shortages occur (short-term borrowing, credit lines, delaying spend).
9. Review and update frequently as actual results come in.
Checklist: items to include in a cash budget
– Beginning cash balance.
– Collections from current and prior period sales (accounts receivable).
– Cash sales receipts.
– Cost of goods sold and payments to suppliers (inventory purchases).
– Payroll and related taxes.
– Rent, utilities, insurance, and other operating expenses.
– Taxes, interest and scheduled debt repayments.
– Capital expenditures (equip., IT, facilities).
– Dividend or owner withdrawals (for private entities).
– Contingency/ emergency reserve (recommended buffer).
– Any expected nonoperating cash flows (asset sales, investments).
Worked numeric example (compact)
Assumptions for July:
– July beginning cash: $20,000.
– Sales in June: $300,000. Company collects 80% of a month’s sales in the following month and 20% two months later. So, collections from June sales in July = 80% × $300,000 = $240,000.
– Additional cash receipts from older receivables = $100,000.
– Production requirement in July: produce 4,000 pairs at $50 per pair → production cash outflow = 4,000 × $50 = $200,000.
– Other non-production cash costs (insurance, etc.) = $60,000.
Compute:
– Total cash available in July = beginning cash + collections = $20,000 + $240,000 + $100,000 = $360,000.
– Total cash outflows = $200,000 + $60,000 = $260,000.
– July ending cash = $360,000 − $260,000 = $100,000.
This ending balance becomes August’s beginning cash in the roll-forward.
Special considerations and risks
– Growth mismatch: rapid sales increases can create working-capital strain (need more inventory, labor, or machinery) even while top-line revenue rises. Plan financing for scaling.
– Seasonality: account for peak production or collection lags.
– Collection patterns: inaccurate accounts receivable timing causes the largest forecasting errors. Use aging reports to refine assumptions.
– Contingency planning: keep a buffer or committed credit line for unexpected needs.
– Frequent revisions: update forecasts when actual sales, margins, or payment behaviors change.
Practical tips
– Keep the short-term budget (monthly or weekly) tight and update it more often; review the long-term plan quarterly.
– Tie the cash budget to accounts receivable and accounts payable schedules for consistency.
– Use sensitivity scenarios (best case, base, worst case) to see how different assumptions change funding needs.
– Maintain a minimum cash reserve percentage or a committed line of credit.
References
– Investopedia — Cash Budget: https://www.investopedia.com/terms/c/cashbudget.asp
– Corporate Finance Institute (CFI) — Cash Budget: https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-budget/
– U.S. Small Business Administration — Prepare financial projections: https://www.sba.gov/business-guide/manage-your-business/finances/prepare-financial-projections
Educational disclaimer
This explainer is for educational purposes and does not constitute individualized financial advice or a recommendation to buy or sell any financial instrument. Consult a qualified
accountant or financial advisor before making material financing or operational decisions.
Quick implementation checklist
– Gather base data: beginning cash balance, scheduled cash receipts (collections), scheduled cash disbursements (payments), known financing events (debt service, draws).
– Choose cadence: weekly for tight cash businesses; monthly for most small/medium firms; daily rolling for high-velocity operations.
– Build structure: rows for each cash inflow/outflow category; columns for time periods; formulas for net cash flow and ending cash.
– Set rules: minimum cash reserve target, approval thresholds for transfers or draws, frequency of reconciliation.
– Stress-test: produce best-case, base-case, worst-case scenarios and note trigger points for financing actions.
Step-by-step small numeric example
Assumptions: a small retail shop prepares a monthly cash budget. Minimum cash reserve target = $5,000.
Formulas
– Net cash flow = Cash receipts − Cash disbursements
– Ending cash = Beginning cash + Net cash flow + Net financing (borrows − repays)
Month 1 (January)
– Beginning cash = $10,000
– Cash receipts (collections from sales) = $25,000
– Cash disbursements: rent $3,000; payroll $12,000; inventory suppliers (payments) $11,000; utilities & other $2,000 → Total disbursements = $28,000
– Net cash flow = $25,000 − $28,000 = −$3,000
– Ending cash = $10,000 + (−$3,000) + $0 financing = $7,000
Assessment: Ending cash $7,000 exceeds reserve $5,000 — okay, but tight.
Month 2 (February) — slower sales expected
– Beginning cash = $7,000
– Cash receipts = $18,000
– Disbursements = $26,000 (same cost structure, slightly higher supplier timing)
– Net cash flow = $18,000 − $26,000 = −$8,000
– Ending cash without financing = $7,000 − $8,000 = −$1,000 → shortfall
Action: Draw $6,000 on a committed line of credit
– Net financing = +$6,000
– Ending cash = −$1,000 + $6,000 = $5,000 (meets reserve)
Document the decision and schedule repayment terms in next-period budget.
How to run sensitivity scenarios (simple)
– Base case: expected collections = $18,000 (Feb)
– Best case: +15% collections → $20,700
– Worst case: −20% collections → $14,400
Recompute net cash flow and ending cash for each case; identify when ending cash < reserve or goes negative and predefine contingency (delay non-essential capex, draw line of credit, negotiate supplier terms).
Practical controls and data sources
– Reconcile budget to bank statements weekly.
– Tie receipts to accounts receivable aging (define: schedule of customer invoices and expected collection dates).
– Tie payments to accounts payable aging (define: schedule of supplier invoices and agreed payment dates).
– Use version control for the budget and keep an assumptions tab that lists collection rates, payment lags, and seasonality factors.
Key liquidity metrics to watch
– Cash burn / build (period net cash flow): shows actual cash change per period.
– Minimum cash reserve (target): an explicit dollar or percentage buffer.
– Operating cash flow ratio = Operating cash flow / Current liabilities (measures ability to cover short-term obligations).
– Cash conversion cycle (CCC): days inventory + days receivable − days payable (measures working capital efficiency).
Tools and automation
– Spreadsheets (Excel/Google Sheets) with formulas are standard for small businesses.
– Accounting software (QuickBooks, Xero) can export AR/AP schedules and bank feeds to reduce manual entry.
– Banking tools: automated transfers, sweep accounts, and committed lines of credit reduce timing risk.
– Rolling forecast: extend the budget forward one additional period each time a period closes (e.g., always forecast 12 months ahead).
Assumptions to document and revisit
– Sales growth/seasonality percentages.
– Collection lag (e.g., percent of sales collected in the month of sale vs. next month).
– Payment terms to suppliers.
– Timing of payroll, taxes, and one-off expenditures.
– Planned capital expenditures or debt service.
When to escalate a shortfall
– Ending cash < minimum reserve.
– Consecutive periods of negative net cash flow without an identified mitigation plan.
– Covenant breach risk on debt facilities.
References
– Investopedia — Cash Budget: https://www.investopedia.com/terms/c/c
Budget reference list
– Investopedia — Cash Budget: https://www.investopedia.com/terms/c/cashbudget.asp
– U.S. Small Business Administration — Manage your cash flow: https://www.sba.gov/business-guide/manage-your-business/manage-finances
– Corporate Finance Institute — Cash Budget (guide and examples): https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-budget/
– Khan Academy — Cash flow and financial statements (foundational lessons): https://www.khanacademy.org/economics-finance-domain/core-finance
Educational disclaimer
This information is educational and illustrative only. It is not personalized investment, tax, or legal advice. Consult a qualified professional before making financial or business decisions.