Cash Flow Budgets and their use

Cash Flow Budget
The profit budget lets you know whether the business is viable and how much you can expect to earn from the business over the next financial year. However, because it includes other "non-cash" items such as depreciation etc the profit budget does not reflect your true cash position at any time. You must have a clear understanding of the cash flow cycle for your business i.e. where, when and for what your business will receive and pay cash.

The cycle operates as follows:

  1. Cash arrives in the business from non operating sources, such as accumulated savings, loans, sale of assets etc
  2. This cash, together with the cash generated by the business, is used to pay suppliers for the purchase of materials and to pay operating expenses such as wages, rent, power etc. Part of the cash is also required for taxes and the purchase of assets and other non revenue expenses.
  3. Cash then flows in from sales both cash sales (received immediately) and credit sales (where the customers are invoices and they pay later on.)

The basis for preparing the cash budget is the profit budget and t...

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