Cash Budgets / Cash Flow Forecasts

This blog is purely for cash budgets.  For all other budgets click here

A cash budget (or cash flow forecast) is a forecast of predicted revenues and expenditures.  They have benefits in that they allow firms to: -

• Plan ahead by arranging finances if needed (look at any closing balances which are negative – they are overdrawn – not making a loss!!!)
• Control expenditure if things are not going to plan
• Monitor performance and take corrective action if needed
• Motivate staff (bonuses?) if the targets are challenging but achievable (SMART targets). 
• Target setting so that employees have similar goals to work towards which should benefit the company overall
• Variance analysis can be performed.  You can compare actual figures with expected ones and then make changes for the future base on this past information
• Perform ‘what if’ scenarios to evaluate potential issues

However cash budgets

• Are based on historic data – things change such as the external environment (interest rates, new government, competitors actions)
• May be unrealistic and thus may demotivate staff who may not attempt to achieve them
• Are only a forecast and can still  be wrong!  They are only as good as the data used by the people setting them.
• Can be made too easy so that people will not have to push to achieve it.  Alternatively they could be so hard that people do not even try.
• Could mean that staff may only work towards the target rather than the true goal – e.g. sales targets over profitability especially if they receive bonuses based around the targets.

To complete a very simple cash budget:-

Opening balance

Add inflows (list them separately)

Minus outflows (list them separately

Closing Balance (this is next month’s opening balance)

Notes: -

1. Some budget layouts will have a net inflow which is the difference between the inflows and outflows.  This is added to the opening balance (a negative figure will reduce the closing balance.
2. The inflows and outflows are when cash is paid or received – not when a sale or purchase is made or when any income or expense is accrued.
3. Watch out for non cash expenses such as depreciation or bad debts.  These do not go in the cash budget as no cash has flowed in or out.

Credit sales or payments

•          Watch out for credit sales and purchases!  In a cash budget the amounts go in the month you receive or pay for it!

•          For example January’s Credit sales of £100, 20% is cash and the rest credit sales (1 month's credit) February’s sales is £150.  March’s cash sales go in March but credit sales not till April.  Only do the number of months needed!!!

                                           Jan                         Feb                        March

Cash Sales                           20                         30

Credit Sales                                                       80                        120

Look at the colours above  to match up with when it was sold!

A sample cash budget for a new Business – Nial Satis Sports

Commentary on the cash budget

Nial Satis is overdrawn at the end of each of the first 3 months (negative bank balance).  This is cause by high purchases (probably to set up the business and have enough initial inventory and paying for the equipment when he begins trading in January  These are known as set up costs.  The net cash flow for each month after this are all positive meaning he has more flowing in than out each month.  By the end of April Nial has a positive bank balance.

Nial must ensure he negotiates an overdraft of up to around  £6000.  This is because this is a forecast and may not be accurate.  If the outflows are higher or the inflows lower then he may have a higher overdraft each month and may still be overdrawn at the end of April if the figures are worse by more than £180.  Overall Nial’s liquidity is improving.

Note that there is no mention of profit.  A cash flow forecast / budget does not show this (although it may be possible to work out).  You need an income statement for this