6 Simple Steps to Develop a Cash Budget for Your Business

Published on
October 4, 2023
Written by
Ekky Pramana

Cash is the lifeblood of your business. Inadequate cash flow can lead to liquidity issues, even if your business is profitable. To monitor your cash effectively, creating a cash budget is essential.

Defining a Cash Budget

A cash budget is a tool for managing your business's cash flows, projecting cash receipts, and expenditures. While a budget covers your overall financial state, a cash budget focuses on cash movements during a specified period.

Cash flow signifies the money entering and exiting your business. Cash budgeting can encompass periods ranging from a week to a year, helping you ascertain if you'll have sufficient cash to meet your obligations.

Creating a cash flow statement within the cash budget framework not only provides insights into cash flows but also guides efficient allocation of surplus cash.

Why Create a Cash Budget?

Understanding Financial Health

A cash budget offers a real-time snapshot of your financial well-being by tracking cash flows. It highlights when and how bills can be paid, ensuring you have the necessary funds for monthly operations.

Forecasting Future Cash Position

Crafting a cash budget for the coming months allows you to predict your future liquidity based on current inflows and outflows, aiding better money management.

Efficient Surplus Deployment

A cash budget helps you make decisions about surplus cash. Whether investing or reducing expenses, managing excess funds wisely prevents waste. For cash-strapped situations, you can strategize to maintain a healthy reserve.

Managing Seasonal Variations

Businesses experience cyclical variations, with some months yielding substantial cash and others less. A cash flow budget helps deploy cash to bridge deficits during lean months.

Preparedness for Contingencies

Unexpected business emergencies can arise. A well-planned cash budget, which efficiently deploys surplus cash, can be a valuable resource during unforeseen cash expenses.

Elements of a Cash Budget

To foster a successful business, meticulous income and expense planning are crucial. A cash budget aids in estimating and tracking all money entering and exiting your business. Whether for businesses or individuals, a cash budget typically comprises similar fundamental components.

  • Cash Receipts: The primary element is incoming cash or cash receipts received by your business, encompassing all anticipated cash inflows, including advance payments and loans.
  • Cash Payments: This category records all cash outflows, such as rent, raw material purchases, salaries, wages, and loan repayments, within the given period.
  • Surplus or Deficiency: Calculated by subtracting cash payments from cash receipts, this figure indicates your surplus or deficit. It serves as a foundation for decisions on surplus deployment or expense reduction.

The Cash Budget Formula

While creating a cash budget, factors such as time frames, economic conditions, and sales forecasts play a role. Typically, it includes:

  • Beginning cash balance: The previous month's ending balance.
  • Cash inflows for the month: Total receivables for that period.
  • Cash outflows for the month: Expenses like rent and supplier payments.
  • Financing received: Such as credit lines.
  • Ending balance: This becomes the starting balance for the next month.

Ensure you gather these figures before embarking on your cash budget creation.

Example of a Cash Budget

Provided is an illustrative cash budget featuring all its elements, serving as a model for your own cash budget. 

(image link)

Short-Term vs. Long-Term Cash Budget

Cash budgets come in short-term and long-term variations, catering to specific time frames:

  • Short-term cash budgets cover weeks or months, including elements like rent, payroll, supplier payments, and investments.
  • Long-term cash budgets span a year, encompassing elements such as tax payments, loan repayments, capital expenses, and long-term investments. Both short-term and long-term budgets are vital for predicting immediate and ongoing liquidity.

A Step-by-Step Guide to Creating a Cash Budget

1. Determine Cash Inflows

Begin by estimating your monthly cash inflow, factoring in cash sales, credit sales, and initial cash balances for new businesses.

2. Determine Cash Outflows

Next, assess your cash outflows, categorizing them into operating activities (suppliers, vendors, and employee payments), financing activities (dividends or share purchases), and investing activities (fixed asset purchases or external entity loans).

3. Ensure Positive Cash Flow

Ideally, your cash inflow should exceed outflows, preventing potential bankruptcy situations. Prudent expense management is crucial.

4. Use Previous Month’s Ending Balance for the Next Month

Each month, incorporate the previous month's ending balance as the starting balance. Determine the minimum monthly ending balance required and plan to maintain a surplus consistently.

5. Plan for Negative Cash Flow

If cash flow turns negative, consider borrowing funds, be it from family, friends, investors, or financial institutions, to cover deficits. Repay the loan when cash flow becomes positive.

6. Maintain Consistency

Regularly create a cash budget, aiming for minimal loans and positive cash flow. A cash budget is a financial planning document, and consistency is key.

Final Thoughts

Cash budgets are vital for ensuring your company's liquidity. Regardless of your business's size, a cash budget is essential for managing your cash effectively.

With this knowledge, you're ready to create a cash budget for your business. For enhanced financial management, consider the Aspire Business Account, which offers a unified platform for expense management, allowing you to monitor cash inflows and outflows effortlessly.

Ekky Pramana is a seasoned writer specialising in business finance and management. With a writing history at Tech in Asia, Teknoverso, and various other publishers, he leverages his market expertise to empower and educate first-time founders in managing their businesses better.
Ekky Pramana
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