Budgeting Basics and Beyond

17.3. Cash Budget

The budget preparation process normally begins with the sales budget and continues through the preparation of pro forma financial statements. The last schedule prepared before the financial statements is the cash budget. The cash budget is a schedule of estimated cash collections and payments. The various operating budgets and the capital budget are inputs to the cash budgeting process.

The cash budget is prepared for the purpose of cash planning and control. It presents the expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs. It aids in avoiding unnecessary idle cash and possible cash shortages.

The cash budget presents the amount and timing of the expected cash inflow and outflow for a designated time period. It is a tool for cash planning and control and should be detailed so that managers know how much is needed to run their business. If cash flows can be estimated reliably cash balances can be retained near a target level with fewer transactions.

The cash budget should be prepared for the shortest time period for which reliable financial information can be obtained. In the case of many small businesses, this may be one week. However, predicting major cash receipts and cash payments for a specific day is also possible.

The cash budget helps management keep cash balances in a reasonable relationship to needs. It aids in avoiding having unnecessary idle cash ...