Cash Budgeting

What’s it all about?

A technique in Budgeting which allows you to monitor the money coming in and going out of your business and most importantly, allows you to plan not to run out.

A Cash Budget is a plan or forecast that summarises expected inflows and outflows of cash during a period. It helps an organisation anticipate periods when it will have surplus cash (allowing further investment in the business) and more importantly, allow it to anticipate periods when there will be a shortage of cash allowing the organisation to plan for cost reductions, make arrangements for investment or loans so that they don’t run out of cash (go out of business). A Cash Budget will help an organisation make sure that there are always enough funds available to meet day to day needs for cash.

It doesn’t matter how much profit you make, if you run out of cash you are out of business.

We talk about how you can stay in business even though you are making huge losses provided you have cash. Here is a current example.

The investors in Deliveroo are supporting the company, despite its losses, on the expectation of future profits.


The Golden Rule is that we consider cash payments and receipts only.

If it isn’t real money coming into our account or going out of our account, then it isn’t considered.

The main example is depreciation. This is an accounting book entry only, nobody pays anybody depreciation. The only cash involved was what was paid for the asset when it was first bought (or any real money you get when you dispose of it).

This is often misunderstood.

Here is an example from a university’s annual report. Note what’s under expenditure!



6% of the total expenditure isn’t expenditure at all.

Bearing in mind that we are only talking about cash…

The business as a leaky bucket.


Distraction Warning! Ignore the next video, you are meant to be working!

Oh, and I can’t think of holes in buckets without singing this song to myself.

You don’t need to be profitable to be in business.

You don’t need to be profitable to be in business, just have backers that have faith that you will break even by 2020 as does Victoria Beckham although she had a near £9 million loss.

Smaller businesses don’t necessarily have that level of support so ensuring that you don’t run out of money is critical.

Sources of funding.

We don’t know what was agreed, but the Conservative’s help for Nissan will certainly impact on their budgeting – a subsidy.

Download the PDF file .


A worked example.

Looking at Cash and Credit sales.

(Do remember that different teachers may use different techniques and different terms).


Practice Questions

(These aren’t mine, but should be useful for you. Do remember that different teachers may use different techniques and different terms).

Some good discussion of Closing Balances and planning for borrowing in this one..

Quite a comprehensive question and useful to see how an Excel spreadsheet has been used.

A worked exam question here.

Laying out a cash budget in Excel.

Further Reading.

(Articles and news items related to this topic to put it in context for you).

102 jobs lost at one company.

Unfortunately, a common occurrence. A company goes out of business and 102 people lose their jobs as a major customer doesn’t pay in the time period they should.

A typical example.

50,000 companies a year go out of business as the cash didn’t arrive when expected.

We treat this as if it is a theoretical concept, but late payments are forcing 50,000 small companies out of business every year.

This really emphasises the importance of cash budgeting and taking a very cautious approach to your expectations of when you will receive the payment.

Advice to businesses on how to cash budget.

Late payments leading to companies paying their own bills late. But paying the VAT late can lead to penalties.

“Late payments add to problem of VAT arrears

Britain’s late payments culture is to blame for another increase in the amount of VAT that has not been paid on time to HM Revenue & Customs, a leading finance company is warning. LDF says small and medium-sized enterprises often have little choice but to pay their VAT bills late because their cashflow is not sufficient to cope with the late payment of bills by customers.

Official figures show that VAT arrears now stand at £2.58bn, up from £2.55bn in 2014. Most companies pay VAT on the basis of the bills they have issued to customers, rather than the payments they have received, so late payments can cause serious problems.

Peter Alderson, the managing director of LDF, said these pressures were also preventing firms exploiting growth opportunities. “Even though economic growth is accelerating and order books are growing, the problem of VAT arrears does not appear to have improved,” he said. “This is a time when businesses should be able to make significant investments in staff and equipment as the economy grows, but late payments can make this difficult for a lot of SMEs.””

Part of this longer article.

Abuse of power – not paying your suppliers.

We talk about careful management of inflows and outflows to keep our cash balance healthy. Here is an example of a company taking it to extremes by abusing their position of power in the realtionship.

You can see why dealing with large companies is actually an indicator of risk in small businesses. all your orders to one company that then delays paying you for ever.

Possible Written Questions.

(No indication of marks – the more marks a question gets, the more you are expected to write – detail that is, not just words!) If you can’t answer these, you need to do some more reading. I do ‘find’ questions elsewhere, so these aren’t all questions I have used myself.

Comment on the use of a cash budget in budgetary control.

What are the determinants of what should be included in a cash budget?

 Outline what should and should not be included in a cash budget.

Explain the function of a cash budget.

What are the advantages of preparing a cash budget?