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Cash Budget Definition - Investopedia

A cash budget is an estimation of a company's expected cash flows over a period of time, usually a month or quarter. It is created using sales and production forecasts along with expected expenses. A cash budget allows a company to see if it will have sufficient cash to operate over the period. If a shortfall is found, the company must raise additional capital. The cash budget rolls forward monthly, using the prior month's ending balance as the new month's beginning balance to forecast cash needs over time. An example is provided of a clothing company forecasting its cash flows over three months.

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313 views2 pages

Cash Budget Definition - Investopedia

A cash budget is an estimation of a company's expected cash flows over a period of time, usually a month or quarter. It is created using sales and production forecasts along with expected expenses. A cash budget allows a company to see if it will have sufficient cash to operate over the period. If a shortfall is found, the company must raise additional capital. The cash budget rolls forward monthly, using the prior month's ending balance as the new month's beginning balance to forecast cash needs over time. An example is provided of a clothing company forecasting its cash flows over three months.

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Bob Kane
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1/2/2020 Cash Budget Definition

BUSINESS CORPORATE FINANCE & ACCOUNTING

Cash Budget
By ALICIA TUOVILA | Updated Aug 28, 2019

What Is a Cash Budget?


A cash budget is an estimation of the cash flows for a business over a specific period of
time. This budget is used to assess whether the entity has sufficient cash to operate.

How a Cash Budget Works


Companies use sales and production forecasts to create a cash budget, along with
assumptions about necessary spending and accounts receivable collections. A cash budget is
necessary to assess whether a company will have enough cash to continue operations. If a
company does not have enough liquidity to operate, it must raise more capital by issuing
stock or taking on more debt.

A cash roll forward computes the cash inflows and outflows for a month, and it uses the
ending balance as the beginning balance for the following month. This process allows the
company to forecast cash needs throughout the year, and changes to the roll forward adjust
the cash balances for all future months.

Cash Budget Example


For example, let's assume ABC Clothing manufactures shoes, and it estimates $300,000 in
sales for the months of June, July, and August. At a retail price of $60 per pair, the company
estimates sales of 5,000 pairs of shoes each month. ABC forecasts that 80% of the cash from
these sales will be collected in the month following the sale and the other 20% will be
collected two months after the sale. The beginning cash balance for July is forecast to be
$20,000, and the cash budget assumes 80% of the June sales will be collected in July, which
equals $240,000 (80% of $300,000). ABC also projects $100,000 in cash inflows from sales
made earlier in the year.

On the expense side, ABC also must calculate the production costs required to produce the
shoes and meet customer demand. The company expects 1,000 pairs of shoes to be in
beginning inventory, which means a minimum of 4,000 pairs must be produced in July. If the
production cost is $50 per pair, ABC spends $200,000 ($50 x 4,000) in the month of July on the

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1/2/2020 Cash Budget Definition

cost of goods sold, which is the manufacturing cost. The company also expects to pay
$60,000 in costs not directly related to production, such as insurance.

ABC computes the cash inflows by adding the receivables collected during July to the
beginning balance, which is $360,000 ($20,000 July beginning balance + $240,000 in June
sales collected in July + $100,000 in cash inflows from earlier sales). The company then
subtracts the cash needed to pay for production and other expenses. That total is $260,000
($200,000 in cost of goods sold + $60,000 in other costs). ABC’s July ending cash balance is
$100,000, or $360,000 in cash inflows minus $260,000 in cash outflows.

Related Terms
Static Budget
A static budget is a type of budget that incorporates anticipated values about inputs and outputs
before the period begins. more

Operating Cash Flow (OCF) Definition


Operating Cash Flow (OCF) is a measure of the amount of cash generated by a company's normal
business operations. more

Cash Flow Plans


Cash flow plans help policyholders coordinate the payment of insurance premiums, by paying the
premiums in installments out of cash flow. more

Managerial Accounting Definition


Managerial accounting is the practice of analyzing and communicating financial data to managers,
who use the information to make business decisions. more

Gross Margin Defined


The gross margin represents the amount of total sales revenue that the company retains after
incurring the direct costs associated with producing the goods and services sold by the company.
more

Administrative Expenses Definition


Administrative expenses are the expenses an organization incurs not directly tied to a specific function
such as manufacturing, production, or sales. more

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