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What is a Cash Budget?
Most often, cash budgets are used to assess whether or not a business has a sufficient amount of cash to fulfill regular operations. It can also be used to determine whether too much of a business' cash is being spent in unproductive ways.
By creating a cash budget - wherein a firm develops a summary of the anticipated revenues, operating expenditures, purchase and sale of assets, and settlement or admission of debt – one can determine when there will be a need for more cash resources, and when there will be an excess of cash.
What is considered to be cash?
Cash is the amount of assets that a business has available to spend immediately. Cash includes bank account deposits, bank balances, and more. Another word for cash is liquidity.
Why should I have a cash budget?
A cash budget is incredibly important, for smaller businesses especially. A cash budget allows a business to establish the amount of credit that it can extend to customers without beginning to have problems with liquidity.
A cash budget helps you to avoid having a cash shortage during periods when you have numerous expenses.
If you cannot pay your expenses because you have a shortage of cash, you must immediately resolve this problem by ensuring that you bring in more revenue, deferring or eliminating some of your costs or being approved for a larger loan from your bank.
These solutions are time-consuming, costly, and not guaranteed, so it is therefore best to have planned for higher expenses ahead of time, if possible.
Ask your accountant for assistance
Typically, cash budgets are prepared 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 who has experience both working with your accounts and creating budgets, such as your accountant or your bank.
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