Cash Budget

A cash budget estimates a business’s cash inflows and outflows over a specific period (weekly, monthly, quarterly, or annually). It helps determine whether the business will have sufficient liquidity to operate, reveals cash surpluses or shortfalls, and guides decisions about financing, spending, and investment.

Key takeaways

• A cash budget projects cash receipts and cash payments for a chosen time frame.
• It shows whether the company will have enough cash to meet obligations or will need financing.
• Short-term budgets (weeks to months) focus on operating cash needs; long-term budgets (years) include capital expenditures and taxes.
• Ending cash balances roll forward to become the beginning balance for the next period.

How a cash budget works

1. Forecast sales and production, and estimate timing of cash collections (accounts receivable).
2. Forecast cash payments: payroll, rent, utilities, supplier payments, taxes, and capital spending.
3. Prepare a cash roll-forward: beginning cash + cash inflows − cash outflows = ending cash.
4. Use the ending cash as the beginning balance for the next period and adjust assumptions as new information arrives.
5. If projected cash is insufficient, plan financing options (e.g., short-term loan, equity) or reduce outflows.

Short-term vs. long-term cash budgets

Short-term (weeks to months)
* Focus: day-to-day operations—payroll, utilities, rent, supplier payments, short-term investments.
* Typically updated frequently to reflect actual collections and payments.

Long-term (year to several years)
* Focus: capital expenditures, long-term investments, quarterly/annual tax liabilities.
* Requires strategic planning and often more detailed scenario analysis.

Special considerations

• Growth should be managed sustainably: rapid sales growth can strain production capacity, staffing, and supplier relationships and create cash shortfalls.
• Budget for contingencies and unexpected cash needs, especially for new or fast-growing businesses.
• Monitor collections and inventory policies—delays in receivables or excess inventory can worsen cash positions.

Example

ABC Clothing projects monthly sales of $300,000 for June, July, and August (5,000 pairs at $60 each). Collections follow this pattern:
* 80% collected in the month after the sale
* 20% collected two months after the sale

For July:
* Beginning cash balance: $20,000
* Cash collected in July from June sales: 80% of $300,000 = $240,000
* Additional inflows from earlier sales: $100,000
Total cash available in July = $20,000 + $240,000 + $100,000 = $360,000

Expenses:
* Beginning inventory requires production of 4,000 pairs in July at $50 each = $200,000
* Other cash costs (insurance, etc.): $60,000
Total outflows = $260,000

Ending cash for July = $360,000 − $260,000 = $100,000

This ending balance becomes July’s starting cash for August.

Steps to create a cash budget

1. Choose the period and level of detail (weekly, monthly, quarterly).
2. Forecast cash inflows (sales collections, other receipts) and their timing.
3. Forecast cash outflows (COGS, payroll, rent, utilities, taxes, capital spending).
4. Build the roll-forward: beginning cash + inflows − outflows = ending cash.
5. Review for shortfalls or surpluses; plan financing or investment decisions accordingly.
6. Update regularly with actual results and revised forecasts.

Expenses to include

• Cost of goods sold / production costs
• Payroll and employee-related costs
• Rent and utilities
• Supplier payments and inventory purchases
• Insurance, licenses, and operating supplies
• Taxes and interest payments
• Capital expenditures and long-term investments
• Contingency reserves for unexpected needs

Preparing budgets by timeframe

• Short-term budgets emphasize accuracy of timing (when cash is received and paid).
• Long-term budgets emphasize strategic allocation of cash and the impact of large, infrequent items.
• Always carry the ending balance forward to the next period and stress-test scenarios for unfavorable outcomes.

Conclusion

A cash budget is a practical tool for managing liquidity, guiding operational decisions, and planning financing. Regularly updating the budget, closely monitoring collections and payments, and planning for contingencies help ensure the business can meet obligations and allocate cash effectively.