Importance of a Cash Budget

October 14, 2016

Profit is not the same thing as cash. Since most budgets are prepared on the accrual basis of accounting (recognize revenue when earned and not when received; recognize expenses when incurred and not when paid), a master budget (rolling all department, branches, etc. into one main budget) will not be the same as a cash budget. The cash basis of accounting in contrast to the accrual basis of accounting recognizes revenue when received and recognizes expenses when paid.

If credit sales are made, all receivables will not be collected at the same time. If expenses are charged, all payables will not have the same payment terms. When inventory and materials are purchased, they will not necessarily have to be paid at the same time. Therefore, adjustments have to be made taking the accrual budget to a cash budget to estimate the expected future cash flow of a business. Any capital expenditures, also, need to be considered when preparing a cash budget based on the purchase terms of the capital assets. 

Cash Budget A Must

The cash budget is necessary to see the amount of expected cash inflows and outflows during a budget period. Keep in mind that there is a big difference between the statement of cash flows and a cash budget. The statement of cash flows looks backwards. It analyzes what transpired in a previous accounting period. It is important to know where the cash came from and where it went during that period of time, but a cash budget on the other hand looks forward. It estimates the amount of cash flow in future months or future periods, so management can predict if sufficient funds will be available to operate, service debt, purchase new equipment, or if there will be a need to borrow funds to operate the business until the cash flow returns to a level to sustain operations. Therefore, the cash budget is a forward-looking statement. 

Need for Sufficient Cash

A business must know if it is going to have sufficient cash to operate and when cash will be available for needed purchases, loan repayments, etc. Each component affecting cash flow must be analyzed and estimated to determine when cash will be received or paid. As with any budget component, it might be difficult to pinpoint the exact amount of cash flow. The idea of the cash budget, as with other budgets, is to have a direction of where the company is going from a cash standpoint. Will sufficient cash be available to meet current obligations or will some type of financing be required? That is the question!

Posted by: 
Association of Accredited Small Business Consultants


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