Introduction to Cash Budget

Definition and Explanation:

Of all the components of the master budget, none is more important than the cash budget. Liquidity is of paramount importance to a firm even more than earning a satisfactory profit. Cash budget is define as:

“Cash budget shows in detail (usually on monthly basis) budgeted cash receipts and payments of both capital and revenue nature. In addition a cash budget also determines the expected cash cash balance of the organization business at specific intervals (usually on monthly basis)”.

Steps for Preparing a Cash Budget:

Steps for preparing a cash budget are given as follows:

(i) Record the cash receipts.

(ii) Total the cash receipts.

(iii) Record the cash payments.

(iv) Total the cash payments.

(v) Calculate the net receipts (payments) by subtracting total payments from total receipts.

(vi) Record the opening cash balance – beginning of the 1st period.

(vii) Add opening cash balance in net receipts (payments) to determine cash available at the end.

Sections of a Cash Budget:

There are two sections of a cash budget:

(i) The first section is receipts section and lists all cash inflows. This section can be a little tricky as it is not necessary that all revenue from sales are received in cash instantly. Some sales could be on credit basis and some cash may be received from some other sources, such as on disposal of a non-current asset.

(ii) The second section is payments section and shows all cash payments which are planned for the budgeted period. There are however some non-cash expenses which do not involve cash outlay and are not included in cash budget, e.g., depreciation, bad debts, etc. Likewise cash may be spent for capital items such as payments for purchasing non-current assets, repayment of loans etc.

After preparing both sections, the net cash receipts (payments) are determined by finding out the difference between total receipts and total payments . This net cash receipts (payments) once adjusted for the cash balance at the beginning gives the cash balance at the end of the period.

Uses of a Cash Budget:

(i) It helps to identify short and long term cash needs which give time to the management to take appropriate actions in time to avoid such problems.

(ii) It determines future ability of the business to pay trade payables and other debts early to take benefit of cash discount.

(iii) It helps a business to determine that how much credit it can extend to its customers before falling into liquidity problems.

(iv) It reveals any expected surplus of cash which may be invested or loaned for a shorter period.

(v) It ensures that sufficient cash is available when required to fulfill regular operations.