A cash budget is important for both personal finances and business finances. Without a cash budget, a person or business cannot properly organize their finances, because they don't have the knowledge of where their money is coming in and going to. A lack of a cash budget can have devastating effects.
A cash budget illustrates cash flow. It allows a business or person to visually see where their money is coming in and where it is going. There are two main types of budgets: budgets that identify essential expenses and budgets that identify non-essential expenses. Essential expenses are expenses that must be paid to ensure the health of the person or the livelihood of the business, such as a mortgage for a person or rent for a business. Non-essential expenses are basically luxury expenses, such as cable TV for a person or a renovated office for a business.
A cash budget for personal finances is basically an organizational tool. A person can only keep track of so many expenses in his head before he begins to either overlook or completely forget where his money is going. For example, if a person brings home $2,000 monthly, and pays expenses totaling $1,800, he only has $200 left over, but without a budget he may not know that. A budget also allows for the opportunity to identify un-needed expenses and cuts down on non-essential expenses.
Businesses that don't employ a cash budget will likely find themselves out of business before too long. Businesses need to identify where their cash is coming from and how much is coming in. For example, a calculation on cash coming in from accounts receivable and from cash sales will quickly identify where cash is coming in from. Without that knowledge, a business has absolutely no idea how much it can safely spend each month. Businesses must also understand where their money is going to. For example, if a business pays $5,000 per month for contractual work, $4,000 for rent, $3,000 on general expenses and $7,000 on product, that's $19,000. If a business doesn't know that it needs $19,000 each month, financial difficulty will certainly ensue.
Ways to Budget
The best way to budget for both businesses and personal finances is to make two lists. Label one list "essential expenses" and the other "non-essential expenses." Write your total income on the essential expenses list. Write down all essential expenses on essential expenses list. Calculate the total money left over and write that amount on the non-essential expenses list. You can now divvy that money up to pay for non-essential expenses. It's also a good idea to take a portion of that money and place it into your savings as well.
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- Why Is it Important to Create a Cash Budget?