The below mentioned article provides a study note on cash budgeting.

Points to be Considered in Cash Budgeting:

Cash budget is a detailed budget of income and cash expenditure incorporating both revenue and capital items. The cash flow budget should be prepared in the same format in which the actual position is to be presented. The year’s budget is usually phased into shorter periods for control e.g., monthly or quarterly.

Cash budget is concerned with liquidity must reflect changes between opening and closing debtor balances and between opening and closing creditor balances, as well as, focusing attention on other inflows and outflows of cash. The cash budget shows the cash flows arising from the operational budgets and the profit and assets structure.


The working capital is effectively managed through preparation of cash budget wherein the estimated receipts and disbursements for a period into the future are drawn up. Such a budget will open out avenues for efficient management of components that go into the operating cycle.

In preparation of cash budget the following points are considered:

(a) Credit periods allowed to customers.

(b) Credit periods allowed by suppliers to the company for goods and services.


(c) Payments of dividends, taxation and capital expenditure etc., and the months when cash payments are expected to be made.

(d) Non-consideration of transactions which have no impact on cash flow e.g., depreciation.

(e) Minimum cash balance required.

(f) The bank overdrafts limits allowed.


(g) Dealing with the surplus cash e.g., by putting in marketable securities.

(h) Dealing with the cash deficit e.g., arrangements to borrow funds from outside or sale of marketable securities.

(i) Trend of sales.

(j) Periods of debt repayments.


(k) Raising long-term funds during the course of cash budget etc. Cash budget highlights the cash surplus and cash shortage position over the period as shown in figure 35.5 for preplanning to take corrective and necessary steps.

Cash Budgeting

Methods of Cash Budgeting:

A cash budget can be prepared in the following ways:


i. Adjusted Income Method:

In this method, the annual cash flows are calculated by adjusting the sales revenues and cost figures for delays in receipts and payments (changes in debtors and creditors) and eliminating noncash items such as depreciation.

ii. Adjusted Balance Sheet Method:

In this method, the budgeted balance sheet is predicted by expressing each type of asset and short-term liabilities as percentage of the expected sales. The profit is also calculated as a percentage of sales, so that the increase in owners equity can be forecast. Known adjustments, may be made to long-term liabilities and the balance sheet will then show if additional finance is needed.


iii. Receipts and Payments Method:

In this method, all the expected receipts and payments for budget period are considered. All the cash inflow and outflow of all functional budgets including capital expenditure budgets are considered.

Accruals and adjustments in accounts will not affect the cash flow budget. Anticipated cash inflow is added to the opening balance of cash and all cash payments are deducted from this to arrive at the closing balance of cash. This method is commonly used in business organizations.

Format of Cash Budget

It is important to note that the capital budget will also be considered while preparation of cash flow budget because the annual budget may disclose a need for new capital investments and also, the costs and revenues of any new projects coming on stream will need to be incorporated in the short- term budgets. A number of additional financial statements, such as sources and application of funds statement or schedules or loan service payments or capital raising schedules may be produced.