Cash Budget

The Cash Budget (also called the Cash Management, Cash Flow or Working Capital Budget) draws on information from all the other budgets. Because it uses information from the other budgets, it is the last budget prepared before the set of budgeted financial statements are prepared. It is also one of the most important budgets developed. The Cash Budget tracks the inflows and outflows of cash on a month-by-month (possibly even week-by-week or day-by-day) basis.

The Cash Budget is similar to but not exactly the same as a Budgeted Statement of Cash Flows.

• Whereas the cash flows in the Budgeted Statement of Cash Flows are segregated according to operating, investing, and financing cash flows, the cash flows in the Cash Budget are segregated according to receipts and disbursements.
• The Cash Budget must be prepared before the Budgeted Balance Sheet can be prepared. On the other hand, the Budgeted Statement of Cash Flows must be prepared after the Budgeted Balance Sheet and Income Statement are prepared.

The Cash Budget shows the planned sources and uses of cash for the budget period. The various budgets
prepared up to this point provide the information for the Cash Budget. For example, the Capital Expenditures

Budget provides information on disbursements for planned equipment purchases. The Sales Budget provides the information needed to determine budgeted collection of accounts receivable. The Direct Material Purchases, Direct Labor Usage, and the Nonmanufacturing Costs Budgets provide the information needed for budgeted cash disbursements. The ending cash balance appears on the Budgeted Balance Sheet for the period end.

If the Cash Budget is accurate, it will allow the company to plan for any cash shortfalls that may occur during the year and any excess cash that may accumulate during the year. Any excess cash should be invested for the period that it will not be needed.

Furthermore, predicting cash shortfalls will make it easier (and less expensive) for the company to obtain a short-term loan if management is aware of its need before the shortfall occurs and if it is able to present cash inflow and outflow projections to the bank to support its loan request and show the source of the repayment of the loan. In the event of a predicted cash shortfall, the company also would have time to obtain permanent capital from equity sources by selling shares if management determines that is the best alternative.

Although all companies should prepare a Cash Budget, it is particularly important for those that operate as seasonal businesses to do so, preferably monthly. For a seasonal business, Production, Sales, and Ending Inventory by month are also critical budgets.

The following is the format of a cash budget. This format assumes the budgeting is done by quarter, but a monthly budget would be even better, with columns for each month.