Cash Budget is a plan of expected cash inflows and outflows during a specified period of time. These cash inflows and outflows include revenues that are collectable and expenditures that ought to be made either capital or revenue in nature during a specified period of time. A cash budget is one of the main decision-making tools that an upcoming entrepreneur must consider on a regular basis.
The Cash budget as a strategic tool must be done on a regular basis thus either weekly, monthly and yearly so as to cater for all inflows and outflows during the said period and to look at ways to finance the deficit if any and where to invest idle funds if there is.
COMPONENTS OF CASH BUDGET
The main components of a cash budget are the Projected Receipts/Inflows section, Projected Expenditure /Outflows section, Surplus/(Deficit) section and the Projected balance section.
The receipts or inflows section looks at the various projected cash inflows due the company at a specified period of time. These are made up of cash sales,investment income receivable at maturity(i.e if there’s no intention to rollover the principal with interest),insurance claim received,collections from customers,loans contracted(either from banks or from personal relations),Grants received etc. This section looks at all cash collections due the business and at no point should you include non-cash transactions since the focus is solely on cash transactions.
This section of the cash budget looks at the projected payments to be made at a particular point in time. The payments or outflows are either revenue expenditure(i.e the amount of money spent by a business or organization on general operating costs such as rent, insurance, heating, maintenance, salaries & allowances etc. Capital expenditures, commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.
Capital Expenditures are catered for under the payment section of the cash budget and must duly be reported in the period of the outlay. Depreciation which is defined as the consistent allocation of the cost of an asset over its estimated useful life must not be considered under the payment section since its a non-cash transaction. e.g depreciation of building or computers must not be captured under the payment section.
The surplus/(deficit) section is the difference between the projected inflows and projected outflows. There is a surplus if the projected inflows far exceed the projected outflows and there’s deficit if the projected inflows fall short of the projected expenditure. And at this stage, a strategy will be made as to the way forward.
These strategies will be looked at in the next series of articles on the above subject.
The balance section looks at the overall cash position of the company at a particular budget period. And its made up of the projected cash balance brought forward from previous period plus the current surplus/(deficit) during the period. If its a rolling budget then the closing balance for a particular period will be the opening balance in the next period.
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