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written by | August 17, 2022

A Brief About the Format, Meaning, and Use of a Cash Budget

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The cash budget is the only tool that can specify the cash coming in and going out of an organisation over a specific period. Therefore, the major objective of the cash budget is to provide the position of the cash held by a certain organisation at a particular point in time. Many companies prepare cash budgets to predict the flow of cash for the business to be able to function effectively. Therefore, interpreting the cash budget and justifying the acceptable solutions for the cash flow issues in any organisation or corporation is crucial for accomplishing both.

Did you know? A company's cash budget regulates how much financing it can extend without running out of it.

The Cash Budget Format

When looking at the format of cash budget, it is important to realise that the cash budget can be broken down into four distinct sections. This is necessary to comprehend the structure of the cash budget.

The cash budget is broken up into four parts, which are as follows:

  • The first one is the money that was handed over. All of the cash inflows are taken into account here. However, the amount that was obtained via financing is not taken into account.
  • The second one is the cash disbursements. In the cash disbursements, all the cash payments are included. However, the principle and interest repayments will not be included in the cash disbursements.

Also read: Understand Cash Accounting - Cash Account Meaning, Advantages And Limitations

  • The third one is either an inadequate amount of cash or excessive money. At this point, the organisation or the corporation will need to borrow money, or if the organisation has an excess of cash, which will determine whether or not they will be able to make the repayment of the amount that was borrowed in the past.
  • The last component is finance, and under financing, a cash budget will supply the particulars of the repayments and the borrowings predicted within the term of the budget.

The following is an example of the cash budget format:

Cash in the initial stages

       

Sources of Cash

 

 

 

 

+ Sales of the cash

 

     

+ Collection of AR

       

+ Asset sales

 

     

= Availability of cash in total

 

     

Cash utilisation

 

 

 

 

- Materials

       

- Direct labour 

       

- Overhead manufacture

       

- Administrative and sale

       

- Purchases of assets

       

- Payments that are dividend

       

= Cash utilisation in total

       

Position of the Net cash

       

The following objectives should be strived for and achieved when cash budget is designed:

  • Determine whether or not there will be accessible financial resources in distant future
  • Contributes to the calculation of the available access and the cash deficit
  • Helps to provide the foundation for a credible connection to be established with the creditor
  • Ability to effectively manage the flow of financial resources within the company

What Does Cash Budget Mean?

When understanding the cash budget meaning, know that some budgets are created in an organisation before the cash budget is created. These budgets comprise not only the budget for purchases and sales but also the budget for expenditures and capital expenditures. 

Therefore, the cash budget is produced by management after all other budgets have been made. This is because management needs to understand the estimate of the cash quantity present during that time.

The firm's management uses the cash budget to manage the company's cash flows effectively. It is the responsibility of the company's management to ensure that they have sufficient funds available to pay their invoices on the dates that they are due.

Also read: All About GST Accounting - Meaning, GST Journal Entry and Purchase

The Cash Budget Definition

Let’s dive into the cash budget definition. A cash budget is a forecast of anticipated cash inflows meaning receipts and inflows meaning expenses. The cash outflows include the costs and expenses likely to be incurred, and the inflows of cash such as sales, and other revenue. The forecast of the company's estimated cash situation is what is meant to be presented in a cash budget.

Example of Cash Budget

It is possible to make accurate projections of huge sums of cash with the help of cash budget management. Though the unused cash can earn interest in a bank, there might be more opportunities for a higher return. Cash budgets help in ensuring that cash is not kept idle, but is used to efficiently generate income. Businesses and financial advisors consider idle cash or unused cash as inefficient use of resources.    

The funds can be used better by creating new business ventures and growing existing ones. It is the responsibility of the cash budget management team to predict the levels and modifications of the cash required to carry out business operations seamlessly. Below is an example of a cash budget to help you understand this better:

In the above example, Week 1 ends with surplus cash of $,55,000. However, in Week 2, a high amount of $100,000 is paid as a dividend to the shareholders. This results in a negative cash flow of $24,000. Similarly, in Week 3, the purchase of assets worth $50,000 causes a negative cash flow. This outflow also results in a high negative cash flow in Week 3 due to the carry-over from Week 2. Now, the businesses could take a short-term loan to cover both payments. However, the interest expense would be an inefficient use of resources.  

Instead, if they reduce the dividend amount or defer the part of the dividend payment to another week, they can easily meet the expenses without going into a negative cash flow. This planning of estimating the revenues and meeting the expenses is what cash budgets are all about. 

The Concerns Associated With the Cash Budget 

The cash balances can go through frequent fluctuations within a single accounting period. As a result, cash shortages can go unnoticed, placing the organisation in a highly insecure state.

It is recommended that a cash flow prediction be created and maintained every week to detect issues of this kind. This should be done so that the projections may be updated. When this is done, short-term budgets are accurate and may be considered realistic for one month. After a certain point, the accuracy of projections begins to suffer. As a result, many businesses will switch to cash budgeting every month after that point. In essence, the cash budget, created every week, will lose its validity after thirty days, and after a couple of months, it will be mostly inaccurate.

Also read: Different Types of Accounts in Accounting - 3 Types of Accounts

Conclusion

This cash budget is an essential aspect of the overall master budget, serving as a foundation for the computation of the enclosed sum and the amount lost throughout a specific time frame. The financial budget must also be prepared before the master budget can be created. After this particular period, the cash balance that is accounted for in the budget will be determined. This cash budget will be of assistance to the management for the managers in determining whether there will be an insufficient amount of cash or if there will be access to sufficient cash within the allotted period. The management will find this helpful when correctly planning the finances or the cash budget. It is also risk-free to identify the needs of the company with the assistance of the cash budget and to maintain the organisation at a safe level.

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What items does the cash budget not consider?

Ans:

The cash budget does not take into account non-cash items like depreciation, credit sales, etc. .

Q: Who creates the cash budget?

Ans:

Depending on the type of budget, (team level, department level, etc) size of the organisation, it could be the Chief Financial Officer, Finance Controller, or Senior Accountant of the organisation.

Q: How do I create a cash budget?

Ans:

The cash budget starts with the cash at the beginning of the period. Next, add all the cash inflows or income. Now, subtract the cash outflows or expenses from that figure. If the resulting balance is positive or excess, then you have enough cash. Else, you need to adjust your outflows.

Q: How often are cash budgets created?

Ans:

A cash budget is generally created to cover a particular period of time, often within one year. It typically contains a breakdown of the expenses on a monthly or quarterly basis.

Q: What are the main elements of a cash budget?

Ans:

The cash budget is an in-depth projection of future cash flows that consist of cash receipts and expenses, and the net cash flow to manage the cash efficiently.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.