Cash Budget

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

Cash Budget – Definition

The cash budget is an estimate of cash receipt and its payment during a future period of time. It deals with other budgets such as materials, labor, overheads and research and development.
The cash budget is a statement of receipt and payment of cash during a specific time. It is a statement of cash inflow and its outflows during a specific time. Cash Budget is an indicator of probable incoming of cash and its payment. When payments are more than income, in such a situation proper cash management will be enforced. When there is a surplus, expenditure is less than income, in such a case decision regarding how to utilize the surplus.


This budget is an estimate of the income flow of cash and its utilization during a specific period. Here the sources of cash receipts: Receipt from Debtors, Bills receipts, interest as loans, dividend on shares and such other incomes from sale of fixed assets. On the other hand its utilization in the form of payment to creditors, payment of assets purchased and some daily routine payment such as: Wages, rent, post and telephone expenses and entertainment expenses.
The cash budget shows the budgeted cash receipts and cash disbursements for a future period of time. The cash inflows and cash outflows are brought together in a cash budget to show expected cash flows of the company. This summary of estimated cash flows helps the company—to plan future cash availability.
Financial plans are drawn up to anticipate periods of high and low cash availability. Large cash balances imply that the business has not been able to earn the best possible rate of return. Low cash reserves mean that the business will be unable to meet its dues. In general, the company should have adequate cash balance to meet its forecasted cash requirements plus some additional reserve to meet unforeseen contingencies.

Usefulness/Merits of Cash Budget

The following are the merits of cash Budget:
(i) It is helpful in knowing various sources of cash receipt and its utilization.
(ii) It provides information about future probable receipts and payments.
(iii) It provides knowledge of excess cash requirement and how the same can be arranged.
(iv) It is useful in emergencies when cash balances are short and how the gap can be covered.
(v) The proper cash balance will help payment on the due date and thus the advantage of cash balance can be obtained.
(vi) The surplus balances can be invested and profitability will be increased.
(vii) The planning of repayment of short-term and long-term loans can be made.
(viii) This is very useful for making safety cash level to check uncertainties of outflow of cash.

Difference between cash budget and working capital budgets

The main difference between capital and cash budget is as:

Cash Budget Working Capital Budget
Coverage: It is designed to provide all needs of business including funds for acquisition of fixed capital. Working Capital Budget sets forth estimated norms for seasonal current capital needs of the business.
Period: In general, it is for a short period. It is comparatively for a long period.
Nature: Here capital expenditures are taken into account. Here only Non-Capital expenditures are taken into account.

Functions of the Cash budget

The main functions of the cash budget are as under:
1. Forecasting of cash requirement. This budget is useful in the cash requirements for a particular period. This is useful in planning cash requirement at a most profitable time.
2. Cash position. This budget is an indicator of deficit or surplus of cash at a specific time for which management can plan for borrowing or investment of surplus cash.
3. Controlling cash expenditure. Once the departmental budgets are prepared, it becomes difficult to change, every department tries to work with resources specified.
4. Expansion schemes. Expansion is the outcome of surplus resources. Cash budget serves as a technique for co-ordinating the expansion programs.
5. Sound dividend policy. The cash budget is very useful for sound dividend policy. It is always related to the liquid position of the company. The cash dividend is always liked by the shareholders the higher rate is proof of profitability of the company.

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