Cash budget

Cash Budget Definition

The cash budget contains an itemization of the projected sources and uses of cash in a future period. This budget is used to ascertain whether company operations and other activities will provide a sufficient amount of cash to meet projected cash requirements. If not, management must find additional funding sources.

The inputs to the cash budget come from several other budgets. The results of the cash budget are used in the financing budget, which itemizes investments, debt, and both interest income and interest expense.

The cash budget is comprised of two main areas, which are Sources of Cash and Uses of Cash. The Sources of Cash section contains the beginning cash balance, as well as cash receipts from cash sales, accounts receivable collections, and the sale of assets. The Uses of Cash section contains all planned cash expenditures, which comes from the direct materials budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget. It may also contain line items for fixed asset purchases and dividends to shareholders.

If there are any unusually large cash balances indicated in the cash budget, these balances are dealt with in the financing budget, where suitable investments are indicated for them. Similarly, if there are any negative balances in the cash budget, the financing budget indicates the timing and amount of any debt or equity needed to offset these balances.

Example of the Cash Budget

Here is an example of the cash budget, showing the sources and uses of cash by week:

Everson Manufacturing
Cash Budget

  Week 1 Week 2 Week 3 Week 4
Beginning cash $25,000 $55,000 -$24,000 -$63,000
Sources of Cash        
 + Cash sales  +10,000  +12,000 +15,000 +18,000
 + Accounts receivable collected  +180,000 +185,000 +180,000 +192,000
 + Asset sales
 +30,000 0
 = Total cash available  $245,000 $252,000
$181,000 $172,000
Uses of Cash        
- Direct materials -$87,000 -$91,000 -$99,000 -$107,000
- Direct labor  -19,000 -20,000 -23,000 -25,000
- Manufacturing overhead -29,000 -30,000 -34,000 -37,000
- Selling & administrative -35,000 -35,000 -38,000 -38,000
- Asset purchases -20,000 0 -50,000 0
- Dividend payments 0 -100,000 0 0
= Total uses of cash -$190,000 -$276,000 -$244,000 -$207,000
Net Cash Position $55,000 -$24,000 -$63,000 -$35,000

The example shows that an inordinately large dividend payment in the second week of the cash budget, coupled with a large asset purchase in the following week, places the company in a negative cash position. Paying out such a large dividend can be a problem for lenders, who do not like to issue loans so that companies can use the funds to pay their shareholders and thereby weaken their ability to pay back the loans. Thus, it may be wiser for the company to consider a small dividend payment and avoid a negative cash position.

Other Cash Budget Issues

Cash balances may fluctuate considerably within a single accounting period, thereby masking cash shortfalls that can put a company in serious jeopardy. To spot these issues, it is quite common to create and maintain cash forecasts on a weekly basis. Though these short-term budgets are reasonably accurate for perhaps a month, the precision of forecasting declines rapidly thereafter, so many companies then switch to budgeting on a monthly basis. In essence, a weekly cash budget begins to lose its relevance after one month, and is largely inaccurate after two months.