For many businesses, understanding cash flow means the difference between staying in business and filing for bankruptcy. Businesses need a positive cash flow in order to pay their bills and invest for future opportunities. Preparing a cash budget helps the business understand and plan for future cash flow.

What Is A Cash Budget?

A business creates a cash budget as part of the company’s master budget. The master budget encompasses the complete budgeting process, including creating a budgeting income statement, a budgeted balance sheet and a cash budget. A cash budget details the anticipated cash receipts and cash disbursements for the time period covered in the budget. The cash budget includes the amount of projected financing the company will need during that time period.

Gathering Information

In order to create the budget, the budget staff gathers all relevant information needed to complete the budget. The staff reviews cash transactions from the prior year. The staff also reviews the company’s budgeted income statement for the period being budgeted and the accompanying schedules. These schedules include the raw materials budget, the direct labor budget, the manufacturing overhead budget and the selling and administration budget. The budget staff also reviews current lending rates in anticipation of any potential financing needs in the upcoming period. The budget staff also gathers the current year’s budgeted balance sheet.

Preparing the Cash Budget

The budget staff uses the information gathered to prepare the cash budget. The budget staff starts with the ending cash balance from the current year’s budgeted balance sheet. The budget staff estimates the amount of cash receipts for the budget period by reviewing the anticipated sales. The staff adds the cash receipts to the beginning cash balance. The budget staff reviews the direct labor budget, the raw materials budget, the manufacturing overhead budget and the selling and administration budget to determine the expenses that must be paid during the budget period. These represent the cash disbursements and are subtracted from the cash balance. If the net amount remaining at this point is positive, the company has an excess of cash. If the net amount remaining is negative, the company has a deficiency of cash.

Using the Cash Budget

Once the budget staff completes the cash budget, company management determines whether it needs outside financing. If the cash budget shows a deficiency of cash, management needs to provide for that cash. Companies usually provide for cash by borrowing money or seeking an additional cash investment. Management evaluates available credit along with current interest rates to determine if borrowing money makes sense for the company. Management may also consider selling additional shares of stock to obtain the necessary cash to eliminate the deficiency.