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Cash budget - What is a cash budget?

Definition: A cash budget is an estimation of a person's or a company's cash inputs and outputs over a specific period of time.

Cash budgets are mostly used to estimate whether or not a company has a sufficient amount of cash to fulfill regular operations. You can also use it to determine whether too much of a company’s cash is being spent in unproductive ways.

By creating a cash budget - wherein a company develops a summary of the anticipated revenues, operating expenditures, sale and purchase of assets, and admission or settlement of debt – one can determine when more cash resources are needed, and when there will be an excess of cash.

Handing over cash
A cash budget helps determine whether or not a company has enough cash to operate

What is considered to be cash?

Cash is the amount of assets that a company has available to spend immediately. These include bank balances, bank account deposits, and more. Liquidity is another word for cash.

Why should I have a cash budget?

A cash budget is very important, especially for smaller companies. It allows a company to establish the amount of credit that it can extend to customers without having problems with liquidity.

A cash budget helps you avoid having a shortage of cash during periods of numerous expenses.

If you cannot pay your expenses because you have a cash shortage, you must resolve this problem right away by bringing in more revenue, deferring or eliminating some of your costs or being approved for a larger loan from your bank.

These solutions are costly, time-consuming, and not guaranteed, so it's therefore best to plan for higher expenses ahead of time, if possible.

Ask your accountant for assistance

You typically prepare cash budgets for a period of 1-2 years, in monthly intervals.

It can be difficult to create a cash budget, so you may wish to consult someone experienced in working with your accounts and in creating budgets, such as your bank or your accountant.

 

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