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 the steps involved are:

  1. Estimating cash receipts over the budget period.
  2. Estimating cash payments for the budget period.
  3. Calculating the net cash gain (or loss).
  4. Adding in cash on hand at the beginning of the budget period.
  5. Calculating the cash balance (or shortage).
  6. Projecting the amount of extra cash that you may require.


A Cash Flow Budget
Period from April to September 2005 (in thousand $)

Cash Flow Budget for 6 months ending 30 September 2005
 
July
August
September
Cash collected from      
Cash Sales

4000

5500

7000

Trade Debtors

3000

800

1000

Loans

500

500

500

Other Sources

2500

2200

1500

Total Cash Collected                                                       A

10000

9000

10000

Cash Paid
 
 
 
Trade creditors accounts

500

500

2000

Payroll

1000

1500

500

Other expenses

1000

2000

2000

Loan Payments Hire Purchase

1000

500

1000

Purchase of assets

2000

2500

5000

Other purposes – Sundry

500

1000

500

Tax
 
 

7000

  
 
 
 
Total Cash paid Out                                                         B
6000
8000
18000
Net cash gain or (loss) A minus                                C
4000
1000
(8000)
Cash balance at beginning of month                          D
2000
6000
7000
Cash balance at end of month (C plus/ minus D)    E
6000
7000
(1000)