The cash budget is an estimate of cash receipts and their payment during a future period of time. It deals with other budgets such as materials, labor, overheads, and research and development.
The cash budget is an indicator of the probable cash inflows and outflows. When payments exceed income, proper cash management will be enforced.
When there is a surplus, expenditure is less than income, and a decision about how to use the surplus must be made.
The cash budget is a type of budget that estimates cash inflows and the use of cash during a specific period.
Here, the sources of cash include receipts from debtors, bill receipts, interest as loans, dividends on shares, and other incomes from the sale of fixed assets.
On the other hand, examples of cash utilization include payments to creditors, payment of assets purchased, and daily routine payments such as wages, rent, postage, telephone, and entertainment expenses.
The cash budget shows the budgeted cash receipts and cash disbursements for a future period of time.
The cash inflows and cash outflows are brought together in a cash budget to show the expected cash flows of the company.
Significantly, the summary of estimated cash flows presented in a cash budget enable companies to make plans about the future availability of cash.
Financial plans are drawn up to anticipate periods of high and low cash availability.
Large cash balances imply that the business has not earned the best rate of return. Low cash reserves mean that the business will be unable to meet its dues.
In general, companies should have an adequate cash balance to meet the forecasted cash requirements, plus additional reserves to meet unforeseen contingencies.
The following are the merits of the cash budget:
1. Provides information about various sources of cash receipts and the use of cash
2. Provides information about future probable receipts and payments
3. Provides information about excess cash requirements and how these can be arranged
4. Useful in emergencies when cash balances are short, and also in showing how the gap can be covered
5. Ensures payments are made on the due date
6. Surplus balances can be invested to increase profitability
7. Enables planning for short-term repayments and long-term loans
8. Enables a safety cash level to be established to check uncertain cash outflows
The main differences between working capital budgets and cash budgets are summarized below.
| Cash Budget | Working Capital Budget |
| Coverage: Designed to provide all business needs, including funds for the acquisition of fixed capital | Sets out estimated norms for the seasonal current capital requirements of the business |
| Period: Generally for a short period | For a comparatively long period |
| Nature: Capital expenditures are taken into account | Only non-capital expenditures are taken into account |
The main functions of the cash budget are the following:
The cash dividend is always preferred by the shareholders, where the higher rate is proof of the company's profitability.
The cash budget is an estimate of cash receipts and their payment during a future period of time. It deals with other budgets such as materials, labor, overheads, and research and development.
Cash budget is designed to provide all business needs, including funds for the acquisition of fixed capital while workingcapital budget is to sets out estimated norms for the seasonal current capital requirements of the business.
The main functions of the cash budget are the following: forecasting of cash requirement, cash position, controlling cash expenditure, expansion schemes and sound dividend policy.
It provides information about various sources of cash receipts and the use of cash. It provides information about future probable receipts and payments. Ensures payments are made on the due date
It is generally recommended that companies update their cash budgets on a monthly basis. However, the frequency with which the budget is updated may vary depending on the needs of the business.
About the Author
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own.
Content sponsored by 11 Financial LLC. 11 Financial is a registered investment adviser located in Lufkin, Texas. 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. 11 Financial’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links.
For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. A copy of 11 Financial’s current written disclosure statement discussing 11 Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from 11 Financial upon written request.
11 Financial does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to 11 Financial’s website or incorporated herein, and takes no responsibility therefor. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
© 2024 Finance Strategists. All rights reserved.
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it.
