Cash budgets are an important part 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.

After all, liquidity allows businesses to meet their financial obligations, respond to unexpected expenses and market changes, and seize new opportunities.

Using cash budgets to monitor liquidity and plan for the future is important for any business.

Cash budgets are tools used by FP&A experts and finance departments to plan and manage cash surpluses and deficits. They provide useful insight into how a business can better manage its revenue and expenses.  

What Is a Cash Budget?

A cash budget estimates cash inflows and outflows over a specific period of time. Finance teams use cash budgets in various ways.

To begin with, 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 to identify potential deficits and surpluses. Based on the forecasted balances, finance professionals create plans to manage those situations effectively.

A cash budget represents an itemized list of all the sources and uses of cash in a given period. It then rolls it using the current cash balance, creating a plan to manage the net cash position of the period in review. 

Why Are Cash Budgets Important?

Cash budgets serve a number of purposes for finance teams.

For most organizations, cash is a critical component of daily operations. Although some business models are not cash-intensive, they benefit from diligent cash budgeting practices.

Useful Insights

Cash budgets are beneficial because they can highlight and provide useful insight into potential cash deficits.

This helps business leaders plan accordingly and adjust costs so cash balances don’t run too low.

Effective Use of Capital

In the same vein, cash projections can identify periods of time when excess cash balances are generated. This helps financial planners effectively use working capital.

Regulating Expenses

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

Financial analysts can review and explore ways to reduce expenses by identifying these time periods. They can also use cash budgets to create plans to spread the burden of the expenses out over a longer period of time, reducing cash demand.

Will AI replace financial analysts? Find out here.

Sources and Uses of Cash

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

These sources and uses can be used to create efficiencies in processes. 

For example, suppose revenue is high for the period, but cash collections are low. In this case, the budget alerts business leaders to better address collection cycles and manage receivables.

Adhering to a Financial Plan

Finally, creating a cash budget reinforces the principles of adhering to a financial plan.

Highlighting cash sources and uses and identifying potential times when cash balances might run low steers the organization toward more fiscally responsible practices. 

How to Make a Cash Budget

Now that we have established the critical role of cash budgets in financial health, we will move on to the practical steps involved in creating one.

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

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

In some cases, accounting software can identify the sources and uses of cash from a bank account. However, poor record-keeping might impact the availability of information.

To avoid this, manage cash reconciliations and carefully control accounting journal entries.

Learn how to choose the best FP&A software in this article. 

Cash Budget Creation: Step-by-Step Process

Building a cash budget is progressive. Following a step-by-step process will help you build an accurate and thorough budget.

Here are the steps needed to create a cash budget.

1) Identify a Beginning Balance

First, identify the beginning balance that will be used to roll the projected cash balance. 

If the cash budget is for one quarter, the beginning balance should be equal to the ending balance of the previous quarter.

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

2) Identify the Time Period

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

Choose an appropriate timeframe to manage daily cash balances while giving enough future insight to detect any potential issues. 

3) Identify All Sources and Uses of Cash

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

Cash inflows, which are positive, can include revenue from sales, loans, and investments. 

Conversely, cash outflows are negative and include expenses such as payroll, rent, utilities, and inventory purchases. 

4) Net Sources and Uses Against Beginning Cash Balance

Add all 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.

5) 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 the budget is in deficit, identify ways to reduce expenses or increase cash receipts. If it’s in surplus, identify potential uses of the cash that align with the organization’s financial KPIs. 

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, big data is necessary to ensure accuracy, timely execution, and, of course, monitoring.

Datarails’ budgeting software helps your team create and monitor budgets faster and more accurately than ever.

With Datarails, you can replace spreadsheets with real-time data and integrate fragmented workbooks and data sources into one centralized location.

Then, 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. 
Book a Datarails demo today to see it in action. 

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