Cash budgets are an important aspect of financial planning for any organization. While managing the bottom line is critical, cash will always be king when it comes to operating a healthy business.

Cash budgets are one tool that FP&A experts and finance departments use for planning and managing cash surplus and deficits, providing useful insight into how a business can manage its revenue and expenses.  

What Is a Cash Budget?

A cash budget is an estimation of cash inflows and outflows over a specific period of time.

Cash budgets are useful in that they can be produced for long-term and short-term goals, sometimes for as little as one week. Often, a cash budget is made quarterly and reviewed weekly or monthly depending on how critical cash is to the organization’s operations. 

The primary objective of a cash budget is to forecast future cash balances in order to identify potential deficits and surpluses. Based on the forecasted balances, finance professionals work to create plans that manage those situations effectively.

It works by taking an itemized list of all of the sources and uses of cash in a given time period and then rolling it using the current cash balance, creating a plan that addresses how to manage the net cash position of the time period in review. 

Why Are Cash Budgets Important?

Cash budgets are important for a myriad of reasons. For most organizations, cash is a critical component to daily operations. There are business models that are not cash intensive, but even they benefit from diligent cash budgeting practices.

One reason cash budgets are so important is that they highlight and provide useful insight into potential cash deficits.

This helps business leaders to plan accordingly and adjust costs so that cash balances do not run too low.

In the same vein, cash projections can be used to identify periods of time where excess cash balances are generated, thereby allowing financial planners to make effective use of the capital.

Another useful byproduct of cash budgets is that they help to regulate expenses by identifying time periods where expenses run higher than others.

By helping to identify these time periods, financial analysts can review and explore ways to reduce expenses overall or create plans to spread the burden of the expenses out over a longer period of time, reducing cash demand.

Because cash budgets are designed using receipts for income and expenses, it creates a useful map of sources and uses of cash.

These sources and uses can be used to create efficiencies in processes. For example, if revenue is high for the period, but cash collections are low, then it alerts business leaders to address collection cycles and manage receivables better.

Finally, a result of creating a cash budget is that it reinforces the principles of adhering to a financial plan.

By highlighting the sources and uses of cash and identifying potential times where cash balances might run low, it helps to steer the organization to adhere to more fiscally responsible practices. 

How to Make a Cash Budget

Before beginning a cash budget, it is important to point out that a cash budget differs from an overall financial budget in that it is strictly concerned with cash receipts and outflows.

This means that revenue assumptions for the period must be converted to cash receipts for the same period, and the same for expenses.

In some cases, accounting software can help to identify sources and uses of cash from a bank account; however, it is possible that poor record keeping can have an impact on the availability of information.

To avoid this, it is important to manage cash reconciliations along with keeping tight controls over accounting journal entries.

Building a cash budget is progessive. Here are the steps needed to create a cash budget.

Identify a Beginning Balance

First, it is important to identify the beginning balance that will be used to roll the projected cash balance. If the cash budget is for one quarter, then the beginning balance should equal the ending balance of the previous quarter.

This works for any given time period. Always be sure to tie the beginning cash balance to a source like a bank statement

Identify the Time Period

Cash budgets can be built weekly, monthly, quarterly, and annually. They can even be made daily if the organization is cash intensive.

Be sure to choose an appropriate timeframe that will help manage daily cash balances while giving enough future insight to detect any potential issues. 

Identify All Sources and Uses of Cash

Identify every source and use of cash over the time period and group them in an itemized list. Cash inflows are positive, and cash outflows are negative.

Net Sources and Uses Against Beginning Cash Balance

Add all of the sources of cash to the beginning cash balance for the period and then reduce it by the amount of expenses to determine your net cash position

Identify Deficits and Surpluses and Create a Plan

Once you have rolled your beginning balance for the time period, it will highlight cash surpluses and deficits.

Assess the drivers of the balances. If it is a deficit, work to identify ways to reduce expenses or increase cash receipts. If it is a surplus, identify potential uses of the cash that is in line with the organization’s goals. 

Using DataRails to Build Your Cash Budget

Every finance department knows how tedious building a cash budget can be. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.

DataRails is a FP&A solution that can help your team create and monitor budgets faster and more accurately than ever before.

By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you.

This takes budgeting from time-consuming to rewarding. 

Learn more about the benefits of DataRails here.