The cash budget is a written plan that details the receipt and payments of cash. Companies create this budget to determine if they will have a surplus or deficit for the upcoming year. A cash budget deficit indicates the need for external financing to pay operational or other expenses. The cash budget typically includes all activities within a company.
Cash receipts show the money collected from sales. Copious sales do not always indicate the account of cash a company will receive. Selling goods and services on credit will result in accounts receivable. The cash collected from open accounts receivable is what goes on the cash budget. The historical collection rate from open accounts will help companies determine this figure. For example, companies may estimate cash receipts equal 80 percent of monthly credit sales.
The cash budget typically has three groups of payments: inventory purchases, operational expenses and equipment acquisition. Each line will list the expected cash payments for the corresponding category. Only payments during the budget period will go on the budget. Companies will again use historical figures to estimate these payments. Accountants will sum all payment categories and then deduct the total from expected cash receipts. The difference represents a budget surplus or deficit.
When companies experience a cash budget deficit, they look to outside financing to make up this difference. Accountants will report the deficit to management and seek their advice for covering the difference. Companies often have multiple sources of financing. Short-term deficits can require the use of a credit line or bank loan. Accountants will need to include the interest expense in their calculations to determine how the borrowed funds affect future cash flow.
Companies can prepare a cash budget for individual department and divisions within their operations. This provides for a deeper analysis into the use of cash in a company. The master cash budget is then the aggregate totals from each smaller budget. Companies may prepare multiple budgets in order to limit their outside funding to only those departments with the greatest deficits. Surpluses from one department can help offset deficits in others, requiring less financing.