Cash Budget
The Cash Budget
The cash budget is the link between all the individual budgets (The Budget Hierarchy) and the master budget (explained later). For those small businesses that can budget through a single document, this is what they will use.
It forms an overview of how money will be moved to and from the business bank account. This cash budget will then form the proposed cash flow forecast for the budgeted period.
For Example:
| Income (£) | |||
|---|---|---|---|
| January | February | March | |
| Sales | 3000 | 2000 | 3000 |
| Other Income (see note 1) | 1000 | 500 | 500 |
| TOTAL Income for the Month | 4000 | 2500 | 3500 |
| Payments (£) | |||
|---|---|---|---|
| January | February | March | |
| Creditors | 1000 | 3000 | 1000 |
| Other Payments (see note 2) | 500 | 1000 | 500 |
| Purchase/Hire of Fixed Assets | 2000 | 500 | - |
| TOTAL Payments for the Month | 3500 | 4500 | 1500 |
| Bank Account (£) | |||
|---|---|---|---|
| January | February | March | |
| Opening Balance at Month Start | 1000 | 1500 | (500) |
| Add Total Income for the Month | 4000 | 2500 | 3500 |
| Less Total Payments for the Month | 3500 | 4500 | 1500 |
| BANK BALANCE at Month End | 1500 | (500) | 1500 |
NB Figures in brackets mean a negative number, or in this case, an overdraft.
Note 1: Other income such as loans, interest, vat repayments, capital, etc.
Note 2: Other Payments such as loan repayments, interest, VAT, electricity/telephone bills, rent, etc
When compiling the cash budget, you may want to split the Other Income/Other Payments into their individual categories such as those suggested in notes 1 and 2 above.
The cash budget will be analyzed each month to see that it accumulates to what is stated on the other budgets (sales budget, staff budget, etc). Like before, the variances will be calculated and appropriate action should be taken where necessary.
The crucial thing to remember, particularly if you are using the cash budget as your ONLY budget (overlooking the individual budgets), is that you place all credit sales in the month you receive the money and likewise with any payments: it is now common for credit to be given in most businesses.
The Master Budget
The information presented on the cash budget can now be summarized to create the projected Profit & Loss account. A projected balance sheet can also be created to show your business financial position at the end of the budgeted period. These financial forecasts are often required by potential funders but are also good management sources to help plan further ahead into the future.
Using Spreadsheets
The most practical way of compiling budgets is to use computer spreadsheets such as Microsoft Excel. By doing so, you can change figures if any issues occur (known as flexible budgeting), such as an unexpected increase in demand, without having to rewrite the whole budget.
Using computer spreadsheets also reduces (but not eliminates) human error when calculating figures. This is because the computer will follow short arithmetic scripts i.e. The sum of, say, cells A2 to A6 will be expressed in the cell A7. These scripts can be made as specific as you need for making calculations.
If you currently do not use IT intensively in your business, determine how it may affect your business if you reconsidered, by visiting Introducing New Technology.
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