What is a Cash Budget?

A cash budget is a financial plan that outlines expected cash flow over a period of time. It is used to estimate and analyze an individual or business’s income, expenses and liquidity. It is important for businesses to create a cash budget so that they can plan for their current and future cash needs. Cash budgets can be used to help determine how much money a business needs to borrow, when it needs to borrow, and how much money it will have left over at the end of the period.

Why is a Cash Budget Important?

A cash budget is important because it helps businesses to manage their cash flow and plan for their future expenses. It also allows businesses to see if they are spending too much money on certain items, such as inventory, and if they need to cut back on certain expenses. It also helps businesses to plan for future investments, such as expanding the business or investing in new equipment.

Example of a Cash Budget

A cash budget starts with an estimate of the amount of cash that will be generated in the next period. This includes cash from sales, investments, and other sources. Then, the amount of cash that will be spent in the next period is estimated. This includes expenses such as rent, inventory, wages, taxes, and other expenses. Finally, the net cash flow for the period is calculated by subtracting the total expenses from the total income.

For example, a business may estimate that it will generate $50,000 in cash from sales in the next period and spend $25,000 in expenses. The net cash flow for the period would be $25,000. This is the amount of cash that the business will have left over at the end of the period.

Conclusion

Creating a cash budget is an important step for businesses to take in order to manage their finances and plan for future expenses. It helps businesses to determine how much money they will have left over at the end of the period and if they need to borrow money or make investments. A cash budget should be updated regularly in order to ensure that the business is on track with its financial goals.