Definition: A cash budget is an estimation of a person's or a company's cash inputs and outputs over a specific period of time.
Cash budgets are mostly used to estimate whether or not a company has a sufficient amount of cash to fulfill regular operations. You can also use it to determine whether too much of a company’s cash is being spent in unproductive ways.
By creating a cash budget - wherein a company develops a summary of the anticipated revenues, operating expenditures, sale and purchase of assets, and admission or settlement of debt – one can determine when more cash resources are needed, and when there will be an excess of cash.
A cash budget helps determine whether or not a company has enough cash to operate
What is considered to be cash?
Cash is the amount of assets that a company has available to spend immediately. These include bank balances, bank account deposits, and more. Liquidity is another word for cash.
Why should I have a cash budget?
A cash budget is very important, especially for smaller companies. It allows a company to establish the amount of credit that it can extend to customers without having problems with liquidity.
A cash budget helps you avoid having a shortage of cash during periods of numerous expenses.
If you cannot pay your expenses because you have a cash shortage, you must resolve this problem right away by bringing in more revenue, deferring or eliminating some of your costs or being approved for a larger loan from your bank.
These solutions are costly, time-consuming, and not guaranteed, so it's therefore best to plan for higher expenses ahead of time, if possible.
Ask your accountant for assistance
You typically prepare cash budgets for a period of 1-2 years, in monthly intervals.
It can be difficult to create a cash budget, so you may wish to consult someone experienced in working with your accounts and in creating budgets, such as your bank or your accountant.
