How to Prepare Cash Budget?

Cash Budget is the estimation of cash flow within the company over an accounting period. It predicts the cash requirement for the business to operate. The company will prepare a cash budget after all other departments have completed their budget.

Cash budget is a summary of all cash expect to flow into the company through the sale of goods or services and the cash flow out through the purchase of material and other operating expenses. The management will keep an eye on the cash budget if the company expects to meet any cash flow issues. They may prepare for sources of cash such as loans, bonds, issue new shares, or capital injections. With a cash budget, we will be able to see the cash outflow and cash inflow within our company.

Without proper control over cash flow, the company may face the risk of liquidating. As some payments are not able to delay such as payroll, utilities, and so on. The company will not be able to operate when the lack of cash. On the other hand, too much cash on hand means that we lose the opportunity to invest them for more profit.

There are three methods to prepare the cash budget:

  1. Receipt and Payment Method
  2. Adjusted Profit and Loss Method
  3. Balance Sheet Method

Receipt and Payment Method

The receipt and payment method is very straightforward, we simply take the cash at the beginning of the period add the expected cash inflow and deduct the expected cash outflow. Then we will be able to see the cash balance at the end of each month. If the balance is negative, it means that the company does not has enough cash to pay. We need to find other sources of cash such as short-term loans.

Cash receipt includes cash from sell of products, receipt from the debtor, issue new debt/equity instrument or sell of fixed asset/investment.

Cash outflow includes the payment to supplier, debtor, purchase of fixed assets, and other operating expenses.

The accrued revenue and outstanding payments will not include in this method.

Description Amount
Beginning Cash Balance XXXX
Cash receipt from customer XXXX
Cash receive from XXXX
Cash paid to Suppliers (XXXX)
Cash paid to Employees (XXXX)
Cash paid to Creditor (XXXX)
Ending Cash Balance XXXX

Adjusted Profit and Loss Method

This method is the same as the indirect method of cash flow statements. We simply take the net profit or loss and adjust the non-cash transactions. As the income statement follows accrue concept, expense and revenue will be recorded when incurring rather than paid. So the result will be different from the actual cash flow.

The method starts from the net income or net loss then adjusts by adding back the non-cash expense such as depreciation, amortization.

Second, we will adjust with the change of current assets and current liability. An increase in current assets means the cash has flowed out of the company and vice versa. An increase in current liabilities means the cash flow into the company and vice versa.

Third, we need to adjust the cash flow from investing activities such as the purchase of fixed assets, investments, and other long-term assets. The purchase of these assets will cause the cash outflow while selling makes cash flow into the company.

Finally, we must adjust with cash due to financing activities such as loan receipt, loan payment, and capital injection.

Balance Sheet Method

Balance sheet method is similar to adjusted profit and loss, we calculate the cash movement by comparing balance sheet items. The change of each item will result in cash inflow and outflow as we need to pay cash to acquire assets and settle liabilities. Equity movement also results in cash such as capital injection, dividend withdrawal, and net profit.