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Steps for preparing a cash budget

A cash budget helps ensure that your organization, division, or department will have the cash necessary to function throughout the budget period. The cash budget can be broken down into smaller units—months or quarters, for example—within the entire budget period to reflect changing cash flows.

  1. Determine the beginning cash balance. Determine how much cash will be available at the beginning of the period (fiscal year or quarter or month).
  2. Add receipts. Determine the expected receipts—collections from customers—that will flow into the cash account each period.
  3. Cash collections may vary during the budget period. For example, many retail stores expect to receive most of their receipts during holiday seasons.

  4. Deduct disbursements. Based on expected activity, calculate how much cash will be required to cover disbursements—cash payouts—during the period.
  5. Disbursements could include payment for materials, payroll, taxes due, and so on. Some of these expenditures may be evenly distributed throughout the budget period, but some, such as payroll or material costs, may fluctuate as part of the production process.

  6. Calculate the cash excess or deficiency. To calculate the cash excess or deficiency for a period, subtract the disbursement from the sum of the beginning cash balance and the receipts expected during that period.
  7. Determine financing needed. To calculate the cash excess or deficiency for a period, subtract the disbursement from total cash available. If, at the end of the period, there is a cash excess, then financing of operations may be covered by the available cash. If, on the other hand, there is a cash deficiency, then you have to plan on financing the period's cash needs from other sources, such as a bank loan.
  8. Note: Remember to include a stable cash balance beyond the immediate cash needs. For example, a manufacturing division may want to maintain a $30,000 cash balance at all times to cover unexpected cash demands.

    When you borrow money for operating expenses, you need to establish a payback schedule. For each period, include the repayment of loan principal and interest in the cash budget.

  9. Establish the ending cash balance. The ending cash balance for each period will include the receipts and loans less the disbursements and financing costs. The ending cash balance becomes the beginning cash balance for the next period.

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