The portion of the comprehensive budget that “plans” the outflows, inflows, and balances of cash as it stands at various points throughout the period is covered by the cash budget. Opinions vary as to what the most satisfactory budget period is, but perhaps the most popular, fairly detailed plans for a full year are developed in advance and the budget schedule shows the balances and flows for each month. It usually consists of a 13-column schedule with a column for each of the 12 months and and a thirteenth column for aggregates and planned end-of-year balance.
The generalized form of the budget schedule is the essence of simplicity. If we assume a year starting on January 1, the first figure in the fist column should be the amount of cash held at the beginning of the year; this is the opening balance. For budgeting purposes the opening balance includes both cash on hand, and cash in bank.
Following the opening balance, we list the various sources from which we plan to receive cash during the month of January and also list the anticipated amount from each source. Naturally, we next list the planned amounts to be disbursed during January. The formula to follow is Opening balance + Receipts – Disbursements, and this gives us the end of the month balance. This balance is automatically the start of the month balance for February and this adding and subtracting process (above) is repeated. So it goes like that throughout the 12-month period.
Certainly an important reason for the forward-looking cash budget is to detect possible future cash shortcomings and to make arrangements well ahead of time. Another important reason is when shopping for a loan. Bankers will want to analyze copies of up-to-date financial statements but nothing is more useful to them than a detailed cash budget that shows the proposed loan, as a cash receipt within a given month, and then proceeds to show the repayment of the loan with interest on schedule, among the disbursements of one or more later months.
That is a very simple explanation of the cash budget and how it works.