Cash Budget

Cash Budget

What is a Cash Budget?

Definition: A cash budget is a projection of a company’s future cash inflows and outflows. It is usually prepared on a yearly basis and provides details of expected cash receipts and disbursements. The yearly cash budget is divided into monthly or quarterly time periods so that the finance manager can effectively manage the company’s cash position.

What does Cash Budget mean?

A cash budget is an essential tool for running a business. This report focuses only on the cash that is received by the company and the cash outlays that it has to make.

It is important to remember that a cash budget is very different from an income statement. The latter includes entries that do not impact the company’s cash position.

For example, sales that are made on credit will not result in an immediate cash receipt. Similarly, the depreciation that is charged on plant and machinery will not affect the cash balance. But both these entries will find a place in the income statement.

The cash budget includes every transaction that will result in a change in a company’s cash balance. If certain capital assets are to be sold, the anticipated cash receipt for this sale will find a place in the cash budget.

The cash budget serves a very useful purpose. It permits a company to anticipate cash shortages. This allows it the time to make plans to raise cash. If the cash budget indicates a surplus, a company can decide on how to manage this excess liquidity.

Example of a Cash Budget

Inglewood Industrial Corporation has prepared its yearly cash budget for 2018. It projects a cash surplus of $250,000 at the end of the year:

Inglewood Industrial Corporation
Cash Budget for 2018
Opening cash balance on January 1, 2018   200,000 (1)
Expected receipts in the year:
Cash sales3,000,000
Receipts for earlier year’s credit sales    100,000
Sale of plant and machinery    250,000
Loan    400,000
Total receipts3,750,000 (2)
Expected outflows
Payments for raw materials1,800,000
Payment of other expenses1,460,000
Purchase of furniture       40,000
Employees’ wages    400,000
Total payments3,700,000 (3)
Closing cash balance on December 31, 2018 (1) + (2) – (3)    250,000

It’s important to remember the following points about the cash budget:

  • The yearly budget can be split on a monthly basis. This will allow the finance manager to plan the company’s cash position in a more accurate manner.
  • The cash budget can help the company’s management in framing its policies. For example, a cash shortage could prompt a change in the credit policy. A company may decide to switch over from credit sales to cash sales. It could also reduce the credit period that it offers to its customers.
  • When a company prepares a yearly cash budget, it would be in a position to anticipate its liquidity requirements several months into the future. This could give it the time to shop around for the best lending rates and lower its cost of borrowing.


The cash budget is an excellent tool for estimating a firm’s future cash inflows and outflows. It can help to manage a company’s liquidity and ensure that business operations do not suffer because of a lack of cash.