Cash Budgets – A Business Owner’s Guide

by Katie Sawyer, 9 minutes read
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Cash Budgets – A Business Owner’s Guide

What is a cash budget?

A cash budget provides details of a company’s cash inflow and outflow during a specific amount of time, for example, monthly, quarterly or yearly. The main objective of a cash budget is to demonstrate whether your company has enough cash to continue to operate. This budget enables you to decide whether your company needs to create cash reserves if there are projected shortages. Alternatively, a cash budget can help you to settle on how to use surplus funds to benefit your business.

Cash budgets must contain a list of expected sources of cash and also how this cash will be used. You will need to find extra sources of funding, for instance, a bank loan, if your cash budget shows that your business operations will not provide enough cash to meet your projected requirements.

There are two main sections in cash budgets. The first is cash inflows (sales revenues) and the second is cash outflows (expenditures).

Cash inflows

Cash inflows are normally made up of cash collections from customers for current sales or collections on accounts receivable from previous sales. Funds that your business has received from debt financing can also be considered cash inflows. If your business has a large amount of cash in a high-interest account, the interest earned could also be a source of cash inflow. The cash inflow section in cash budgets can become complicated to complete if some of your sales are done on credit. This section can also be complex as some cash can be received from different sources, like disposing of a non-current asset. And if you are in need of an easy to use calculator that makes it easy to find your ROI, then click here.

The cash inflow section in cash budgets contain:

  • The beginning cash balance.

  • Accounts receivable collections.

  • The sale of assets.

  • Cash receipts from cash sales.

Cash outflows

Cash outflows typically include cash payments made for operational expenses such as payroll, taxes, utilities, office supplies and administrative expenses. The repayment of loans and the purchase of new equipment are also considered to be cash outflows. There are some non-cash expenses that are not contained in cash budgets because they do not entail a cash outlay, for example, bad debts and depreciation.

Cash Budgets - A Business Owner's Guide

The cash outflow section in cash budgets contain:

  • Planned cash expenditures.

  • Fixed asset purchases.

  • Dividends.

After you have prepared both sections of your cash budgets, the net cash receipts are worked out by the difference between total receipts and total payments. This net cash receipts, when adjusted for the cash balance at the beginning, provides the cash balance at the end of the period.

Different types of cash flow budgets

Although cash budgets are typically used for short-term financial planning, you can also utilize cash budgets to provide an interim or long-term view of your business.

The following provides details of how to use cash budgets for different financial planning periods:

  • Short-term cash budgets

Short-term cash budgets are designed to resolve cash requirements on a week-by-week or month-by-month basis. These cash budgets enable you to project what you should allocate funds to immediately and also the sources that these funds must come from. You can also use this type of cash budgets to establish short-term investments that you could earn interest on, while the cash is not being used. For instance, if your business has excess income for a few weeks, you can invest in stocks and shares or short-term deposits, which can produce income for your company’s future needs.

  • Interim cash budgets

Cash Budgets - A Business Owner's Guide

Interim cash budgets are generally created for a period of 12 months. They are based on the current year’s transactions and are normally created at the end of the year. You need to take into account elements such as seasonal variations, reoccurring changes that affect the dynamics of your cash budgets and your normal income and expenses. You will be in a position to make decisions about what your company needs to borrow on an annual basis and accumulated accounts receivable plans after you have created your interim cash budget. These types of cash budgets also provide principal loan payouts, insurance payments and annual increments to your employees.

  • Long-term cash budgets

Long-term cash budgets are normally allocated over many years. These cash budgets help you make strategic business decisions, for example, business diversity plans and capital investment in equipment. It’s based around your company’s long-term forecast that enables you to reach your objectives. Your long-term cash budgets will form the basis of your interim and short-term cash budgets to carry out your plans for your business.

Reasons for using a cash budget

Analyzing the variance between the budgeted and the actual amount of cash on a monthly basis is useful for businesses to take control of unforeseen cash uses. A cash budget enables you to make informed decisions about your cash reserves. You are also able to build up a picture of your company’s cash cycle, which will help you to prepare more accurate forecasts.

Here are some additional uses of cash budgets:

  • Assesses your long-term borrowing needs.

  • Spots your short-term and long-term needs and gives you time to take the appropriate action.

  • Identifies how much credit you can offer your customers before experiencing liquidity issues.

  • Reveals the future ability of your business to pay off debt early in order to take advantage of cash discounts.

  • Makes sure that enough cash is available for normal business operations.

  • Shows unexpected excess cash, which you can invest or loan over a short period of time.

How to create cash budgets for your business

Cash Budgets - A Business Owner's Guide

In order to be effective, cash budgets should contain the following components:

  • Time period

You need to decide the time period that will be applicable for your cash budgets. The time period you choose will depend on the needs of your business. You can select a weekly, monthly, quarterly or annual time period. Alternatively, you can opt to create different cash budgets for the short, interim and the long term of your business.

  • Cash position

The amount of cash you decide to keep in your company depends on the predictability of accounts receivable, the type of business you own and the possibility of opportunities and threats happening quickly. You can also choose to view your cash reserves in relation to a specific number of sales.

  • Estimated sales and expenses

One of the most important aspects of a cash budget is the estimation of your sales. This is because the main purpose of cash budgets are to provide an approximate of your future cash receipts and cash expenditures over a period of time.

You need to adjust your different financial accounts to portray your desired increase in sales. You must also revise your inventory, raw materials and the cost of goods sold to reflect any increase in sales. Furthermore, you must also consider whether you need to make additions to selling or general admin expenses and whether the increased sales can be dealt with by current excess capacity.

After you have decided on your period of time, your cash position and your estimated sales and expenses, the following should be included in the cash receipts part of your cash budgets:

  • Cash balance – This is the cash that is immediately available to your business. This consists of petty cash, saving accounts and anything that is contained in your checking and other cash accounts.

  • Cash sales – When you determine the base figure of your cash sales, it must be altered for trade or other discounts and potential returns.

  • Collections of accounts receivable – After you have worked out a base level of your accounts receivable, it should be altered to show the amount that will be paid during a specific period of time.

  • Other income – It is possible that other income, which is separate from what you receive from sales could have a positive effect on your company’s cash position. These other income sources could include dividends, investments or unexpected borrowing.

Cash Budgets - A Business Owner's Guide

You should include the following in the expected cash expenses part of your cash budgets:

  • Inventory or raw materials – Raw materials and inventory normally constitute a large amount of cash spend. You should review your past spend on inventory to determine how much your business is expected to spend in the future. It is recommended that you speak with your suppliers to find out whether they plan to change their prices. This information will enable you to create more accurate cash budgets.

  • Payroll – Paying employees salaries is usually the second biggest expense for a business. You should also include estimations for the relevant taxes.

  • Advertising – You need to budget for marketing and advertising campaigns across all relevant mediums, for example, social media influencers, radio and newspapers.

  • Other direct expenses – This line item on your cash budgets should be used for expenses that are difficult to categorize under any other heading. For instance, loan payments should be added under other direct expenses.

  • Administrative expenses – You should include general office expenses such as telephone bills and utilities under this line item. It is possible to accurately forecast for administrative expenses because they generally do not increase or decrease by a large amount.

  • Selling expenses – Normal selling expenses include commissions for salespeople and salaries. You can also add travel and other activities in relation to sales under selling expenses.

  • Plant and equipment – You need to include cash payments for mortgages, repairs, and equipment loans in this section.

  • Other payments – This line item lists other cash payments that you expect to make, but do not fit under the other line items. Tax payments and interest payments are generally included under other payments. You should also include your employee schedule software as one of your cash payments, and if you’re still using pen & paper and aren’t yet using a scheduling platform, then click here to begin A trial of the retail employee scheduling software Nike, Amazon Pop-up and Ace Hardware use

Cash budgets example

Cash Budgets - A Business Owner's Guide

The cash budgets example below is provided by Accounting Explained. The example shows that Company A keeps a minimum cash balance of $5,000. In case of a shortage, a loan is obtained at 8% annual interest on the first day of the period.

The challenges associated with cash budgeting

You must plan your business cash budgets meticulously. This is especially the case when your business is new and you have no previous records to refer to. Expenses like employee wages and petty cash are easy to budget for. However, there may be some variables that are more difficult to predict, particularly when your business is in the growth stage. Fluctuation in sales can also prove challenging because a reduction in your sales means less cash inflows. However, an increase in sales could result in more spending on expenses, like buying raw materials and overtime pay.

Given that cash budgeting is a critical aspect of your company’s financial reporting, we recommend that you seek the advice of a professional, such as an accountant when preparing your cash budgets.

Since payroll is one of the biggest expenses on your cash budgets, it’s vital that you have an accurate record of the number of hours your employees work. Deputy integrates with leading payroll software and helps you to manage your hourly employees’ schedules. Sign up for a free trial with Deputy today by clicking below to find out how we can help to improve your employee scheduling procedures.