Creating a budget helps small businesses not only plan for the future but also helps them allocate available income against upcoming expenses (e.g. administrative expenses, advertising, and equipment), helps them apply for a bank loan, and helps them avoid financial problems before they become more serious.

In this post we look at what accurate cash budgets consist of and why you need one to be in the best financial position you can be!

Cash Flow vs. Cash Budget

Monitoring cash flow is an essential part of running a business. Cash flow is simply the flow of money coming in and going out of a business. Positive cash flow means there’s more money coming into the business than leaving it. Whereas with a negative cash flow there are more cash outflows to the business compared to cash influxes.

Cash flow is a crucial part of any business because it can help cover short-term debt, gives you more negotiating power, makes it easier to plan for the future, and creates a more valuable business.

What is a cash budget?

A cash budget is a plan of expected cash inflows and outflows of a business over a period of time, which can be weekly, monthly, quarterly, or annually. Cash budgeting uses the ending balance as the beginning balance for the next month. This process allows businesses to forecast cash needs for the future, and adjusts the cash balances for all future months by changing to the roll forward.

Ultimately a cash budget is used to determine whether the business has enough cash for operating expenses during the specified time period. It’s also a plan for the most important factor of a company’s viability – its cash position.

Why is a cash budget important?

Your business’ cash position will have an impact on your business plans, how a bank responds to a loan request, how suppliers will be paid, how quickly your business can grow, profitability, etc. Your cash position may be affected by more than just sales. Other avenues like investments or dividends may positively contribute to your income.

Although all businesses can benefit from creating a cash flow budget, cash-strapped businesses and start-ups will find this particularly useful. Preparing a cash budget is as easy as 1, 2, 3!

How to prepare a cash budget

1. Determine Your Cash Inflows

Knowing how much money is coming into your business is essential because your business income determines how much money you have to spend. Determining a time period is also essential. Are you preparing a budget on a monthly basis, annual or some other time frame?

2. Evaluate Your Cash Position

Your cash position (amount of cash you wish to keep on hand) will depend on multiple factors, such as accounts receivable and the likelihood of opportunities (or even setbacks) that may demand for a significant reserve of cash.

One way to consider your cash reserve is in terms of a certain number of days’ sales. This can help you determine if (at the end of the period) you have a sufficient cash reserve.

3. Estimate Cash Receipts and Cash Expenditures

A fundamental concept of a cash budget is estimating all future cash receipts and cash expenditures that will occur during a certain period of time. One of the most important estimates is that of your sales. If for example you expect an increase in sales by 10%, other accounts (like raw materials) must be adjusted accordingly.

Each type of expense must therefore be evaluated for its potential to increase or decrease. Overall these estimates should be based on your experience running the business and on your goals for your business during a specific time period (such as a quarterly basis) that you’re creating your budget for.

Other categories to consider when creating a cash budget are expected cash receipts and expected cash payments. For your cash balance this includes: expected cash receipts, cash sales, and collections of accounts receivable. Expected cash expenses include raw materials and payroll. Lastly, other direct expenses include: advertising, selling expenses, administrative expenses, equipment, and other payments.

Tips to consider when preparing your cash budget include: remembering to make the ending cash balance the beginning cash balance for the next period, having a realistic sales goal for the period, and adjusting accounts receivable for possible uncollectible amounts.

Short-Term and Long-Term Budgeting

Almost every business should develop two types of cash budgets. A short-term cash budget will cover the next few weeks and even months of daily operations (businesses can create weekly or monthly cash budgets). These are necessary to ensure your business can cover all of its expenses. A long-term cash budget helps you plan for the foreseeable future.

Short-Term Cash Budget

Base your short-term cash budget on your most recent cash flow history and projections. Take into account your regular, fixed costs, as well as any one-time expenses you know are coming. Review this budget on a regular basis and adjust it as necessary based on the performance of your business.

With a short-term cash budget, businesses can avoid awkward situations. No business wants to miss payments to suppliers or loan payments or even go into a negative balance to cover payroll. By keeping careful track of your income versus expenses, budgeting creates peace of mind as well as efficiency.

Long-Term Cash Budget

Long-term cash budgets are important for growth planning. These operate over the next quarter, two quarters, or even a year. Whether you hope to open a second location, hire new employees, or launch a new product line, it’s imperative to budget for these expenses ahead of time.

If you plan to seek investors or apply for additional funding, a realistic cash budget will be one of the first things you are asked for. Having both an accurate short-term budget and a realistic long-term budget can be the difference between stagnation and success for a small business.

Prepare for the Unexpected

Having a credible budget in place can mitigate a shortage of cash when unforeseen circumstances occur (like a pandemic), during periods of change in a business, when you need to manage limited financial resources, and even for when your sales are traditionally seasonal.

A cash budget can protect a company against an unexpected cash outflow (e.g. additional required supplies, increase in minimum wage), which will ultimately impact the company’s financial position.

If a business is just starting out, it’s essential that they budget cash requirements for any emergencies or unexpected costs that require cash, especially if aspects of the operations are not fully developed.

Not all unexpected circumstances are unwanted. Take, for example, when there’s an unexpected bulk discount from suppliers. Having a solid cash budget in place will help you take advantage of such opportunities and may even lead to an excess of cash.


Be proactive rather than reactive. Businesses that don’t implement cash budgets until after they have become necessary will struggle to get their actual cash flow under control. This will only make a bad situation worse.

In contrast, successful businesses that create budgets before problems begin will be in a much better position to weather the inevitable challenges of running a small business. Ultimately cash budgets are an important part of financial management.

If you need advice on how cloud accounting can work for your business and help provide you with a financial statement to build a cash budget, you can request a free consultation right here. Creating a cash budget will help you build a solid financial plan and ultimately protect you against the unexpected.