cash budget

Picture checking your bank account at the start of each month and asking three things: how much do I have now, how much will come in, and how much must I pay out — so will I still have enough at month-end, or will I dip below zero before payday? Do that for a whole year, month by month, and you have built a cash budget. It is a calendar of money moving in and out, designed to spot the months when the account would run dry.

Formally, the cash budget is a detailed plan of expected cash receipts and cash payments over a period, usually month by month. Its structure is: beginning cash balance + cash receipts (mainly collections from customers) − cash payments (for materials, wages, rent, taxes, equipment, loan repayments) = ending cash balance, which becomes next period's beginning balance. If a shop starts March with 5,000, expects to collect 12,000, and must pay out 14,000, it ends March with 3,000. Many cash budgets also show a 'financing' section: if the ending balance would fall below a required minimum, the plan arranges a loan; if there is surplus, it plans to repay debt or invest.

The cash budget matters because cash, not profit, is what pays the bills — a business can be profitable on paper and still fail because it cannot meet payroll. The cash budget gives early warning of shortfalls so a loan can be arranged in advance rather than in a panic, and it flags surpluses that could be put to work. The key insight, and a common misconception it corrects, is that profit and cash are different: a credit sale adds to profit immediately but to cash only when the customer pays, and depreciation reduces profit without ever using cash.