TD Bank, America's Most Convenient Bank Print this page | Close this window   

Prepare a Cash Budget


Just as you would not purchase new furniture for your home without enough cash, or at least a solid plan to cover a personal loan from your bank, your business needs the same careful handling of its expenditures. All businesses, no matter what type or size, need to properly develop a plan for their expected cash intake and spending. This plan is commonly known as a cash budget, and it can be prepared quarterly or annually.


  1. Purposes of Cash Budgeting
  2. Consistent Budgets
  3. Checking the Reasonableness of the Budget
  4. Sales and Other Potential Cash Sources
  5. Reserve
  6. Sample Cash Budget
  7. Resources

I. Purposes of Cash Budgeting

Properly preparing your cash budget will show how cash flows in and out of your business. Also, it may then be used in planning your short-term credit needs. In today's financial world, you are required by most financial institutions to prepare cash budgets before making capital expenditures for new assets as well as for expenditures associated with any planned expansion. The cash budget determines your future ability to pay debts as well as expenses. For example, preliminary budget estimates may reveal that your disbursements are lumped together and that, with more careful planning, you can spread your payments to creditors more evenly throughout the entire year. As a result, less bank credit will be needed and interest costs will be lower. Banks and other credit-granting institutions are more inclined to grant you loans under favorable terms if your loan request is supported by a methodical cash plan. Similarly, businesses that operate on a casual day-to-day basis are more likely to borrow funds at inopportune times and in excessive amounts. Without planning, there is no certainty that you will be able to repay your loans on schedule. However, once you've carefully mapped out a cash budget, you will be able to compare it to the actual cash inflows and outflows of your business. You will find that this comparison will go a long way in assisting you during future cash budget preparation. Also, a monthly cash budget helps pinpoint estimated cash balances at the end of each month which may foresee short-term cash shortfalls.

Back to Outline

II. Consistent Budgets

Cash budgeting is a continuous process that can be checked for consistency and accuracy by comparing budgeted amounts with amounts that can be expected from using typical ratios or financial statement relationships. For example, your treasurer will estimate the payments made to your suppliers of merchandise or materials, the payments to employees for wages and salaries, and the other payments that you are obligated to make. These payments can be scheduled by dates so that all discounts will be taken, and so that no obligation will be overlooked when it comes due. Cash collections from customers can also be estimated and scheduled by dates along with other expected cash receipts. With careful cash planning, you should be able to maintain a sufficient cash balance for your needs and not put yourself in the position of holding excessive balances of nonproductive cash. In the normal course of operations in a merchandising business, for example, merchandise is purchased and sold to customers who eventually pay for the merchandise sold to them. Usually there is a time lag in business operations. It may be necessary to pay the suppliers for merchandise before the merchandise is sold to the customers. Before and during a busy selling season the demand for cash may be higher than the inflow of cash from operations. In this case it may be necessary to arrange short-term loans. When the selling season is over, cash collections from customers will be relatively large and the loans can be paid off.

Example of a Cash Budget

The following is an example of a cash budget for the 90 days provided below for the XYZ Company.

Beginning cash balance $ 320,000
    Estimated collections on accounts receivable 750,000
    Estimated cash sales 250,000
    Estimated payments on accounts payable $ 800,000
    Estimated cash expenses 150,000
    Contractual payments on long-term debt 150,000
    Quarterly dividend 50,000
Estimated ending cash balance $ 170,000


Analysis of Example Cash Budget

Analysis of the financial statements of the XYZ Company shows that the accounts receivable remain at about $500,000 throughout the year; that is, there is no seasonal fluctuation in sales. The accounts receivable turns over six times a year, or once every 60 days. The inventory throughout the year remains at about $800,000 and turns over every 90 days. The accounts payable remains at about $400,000 and turns over eight times a year, about once every 45 days. With an accounts receivable collection period of 60 days and an average balance outstanding of $500,000, it appears that $750,000 is the amount that should be collected on the receivables in 90 days. Cash sales should amount to about $250,000 if the inventory of $800,000 valued at cost turns over once in 90 days and if the average markup is about $200,000. Therefore, if an inventory of $1,000,000 at retail turns over once every 90 days and $750,000 flows through accounts receivable, then approximately $250,000 must be sold on a cash basis. Cash payments for expenses are estimated to be $150,000 in the next 90 days. This figure can be roughly checked by referring to the expenses on the income statement. A rough measure of the cash expenses can usually be obtained by using the operating expenses less any non-cash expenses such as depreciation. For example, if there is no seasonal factor, the total amount divided by four should be an approximate check on the amount budgeted for the next 90 days.

Back to Outline

III. Checking the Reasonableness of the Budget

If it appears that the budgeted amounts will differ substantially from ratios and relationships taken from past statements, then further attention should be given to the budget. For instance, some factors may have been overlooked in budgeting, or past statement relationships may no longer be applicable, due to unrecognized changes.

Back to Outline

IV. Sales and Other Potential Cash Sources

Normally, sales activity is expected to produce the bulk of the cash receipts. If sales are made on a credit basis, accounts receivable will eventually be translated into cash as the customers pay their accounts. The time required to collect outstanding accounts will have to be estimated, and provisions must be made for discounts, returns, allowances granted, and uncollectable accounts. In addition to sales, there are many other potential cash sources. These sources must be examined for possible additions to cash when setting up a total cash receipts budget for the year. Dividends and interest may be collected on investments or cash may be received from an incidental operation (i.e., rent or sale of scrap material). Ordinarily, cash will be realized from the sale of investments in stocks and bonds and from the sale of machinery or other assets not incurred in the normal course of trade. As a result of cash flow, stock may be issued or debt may be incurred with cash flowing. The various cost budgets, plans for capital acquisitions, commitments for the discharge of debt, and plans for dividend payments are brought together in a cash disbursements budget. If possible, payments will be scheduled at convenient times, when cash balances are expected to be sufficiently high. Frequently, the demand for cash is not spread evenly throughout the year. Several large payments may become due in one particular month. If cash receipts in that month are not expected to be sufficient, the company will either plan to hold back cash for these payments or will borrow. It is unlikely that disbursements will be made in every instance when costs are incurred or when materials and services are used. Advertising, insurance and rent, for example, are often paid in advance with the cost being absorbed against future operations. A debt of cash disbursements is made by scheduling payments required for materials, labor, other operating costs, dividends, debt service, and so forth. Budgeted cash receipts and disbursements are brought together to form a total cash budget. From this summary of estimated cash flow, it is possible to anticipate future cash balances. In some months, receipts may not be large enough to cover disbursements. If this happens, the cash balance will have to be reduced. If the outflow of cash is too great, plans will have to be made to borrow funds. In other months, when receipts are greater than disbursements, loans can be repaid and cash balances can be built up.

Back to Outline

V. Reserve

Financial plans are drawn up so that a minimum balance of cash will be available at all times. The amount to be held will depend on estimated future cash flows and the financial policy adopted. In general, the cash balance should be large enough to enable the company to meet its payrolls and pay its operating costs for the next month, with some allowance made for contingencies and miscalculations in planning. By holding adequate cash balances, management can cope with small adversities and will not be forced to borrow under unfavorable conditions. If trouble strikes, there will be a reserve to draw upon. While the reserve is being used, management can make alternate plans and can secure additional cash from other sources to meet future needs. Opinions differ as to what amount of cash should be held in reserve. Some companies maintain fairly substantial cash balances as well as a secondary reserve that consists of investments that can easily be converted into cash. Other companies prefer to operate with small cash reserves and when cash is needed depend on a line of credit which is established at a bank. Cash up to a certain limit may be borrowed when needed and arrangements are made for eventual repayment.

Back to Outline

VI. Sample Cash Budget

(You can use the interactive table provided to create a cash budget for your company.)


Estimated cash balance at the beginning of the period..
Estimated cash inflows:
    Cash Sales..
    Collections on credit sales...
    Bank Loans..
Total Inflows
Estimated cash outflows:
    Payments to suppliers..
    Payments of operating and other expenses..
    Payments on equipment loan and interest..
    Payments on bank loans and interest..
    Investment in short-term securities..
Total outflows
Estimated cash balance at the end of the period..
Back to Outline

VII. Resources


Peter Atrill and Eddie McLaney, "Accounting and Finance for Non-Specialists" (Prentice Hall 1997)

Leopold Bernstein and John Wild, "Analysis of Financial Statements" (McGraw-Hill 2000)

Daniel L. Jensen, "Advanced Accounting" (McGraw-Hill College Publishing 1997)

Martin Mellman, et. al, "Accounting for Effective Decision Making" (Irwin Professional Press, 1994)

Eric Press, "Analyzing Financial Statements" (Lebahar-Friedman, 1999)

Gerald I. White, "The Analysis and Use of Financial Statements" (John Wiley & Sons, 1997)