How to manage a cash budget for your business

For many CFOs and Finance Directors, making a cash budget and sticking to it is more of an aspiration than a reality. Amidst all your financial statements, expense reports, and forecasts, do you actually know how much cash your business will have at the end of this month?

The overwhelming demands of running the finance function leave many CFOs and Finance Directors with little time to spend on the budgeting process.

No matter the reality in your finance department, a sincere commitment to creating and tracking cash budgets is essential if you want to be prepared for any surprises. Budgeting control is a matter of habit and discipline. You must believe cash budgets are a top priority in order to form the regular habit of following through on them long term.

What is a cash budget?

A cash budget projects the amount of money coming into and going out of your company in a given period. This lets finance leaders allocate available cash strategically, based on where they expect to see the best return.

To better understand what a cash budget actually is, it’s helpful to consider two analogies:

1. Cash budgets are roadmaps

They begin with a beginning cash balance and end with an ending cash balance. In other words, there’s a start point and an end point. Much like a roadmap, the cash budget will show you how to get to where you want to go.

Specifically, if you want to have a certain amount of cash left at the end of a given period of time, you need to map out a course to get there. This course mapped out within your cash budget is determined by estimating your incoming and outgoing cash flows. We will discuss this in more detail in a moment.

2. Cash budgets are windows

Cash budgets give you a view into how much cash your business has and where that cash will go. Just because you have a roadmap, doesn’t mean you can actually see what's going on around you. You need a window to keep an eye on how your roadmap is performing.

As mentioned earlier, CFOs and Finance Directors deal with a tremendous amount of financial statements, reports, and forecasts on a daily basis. These financial documents may not provide an easy way to see exactly how much cash your business has and where that cash is intended to go over the next month or next quarter.

Cash budgets clearly show your cash balance at the beginning of a time period, and where your cash balance will be at the end of the period.

How to prepare a cash budget for your business

There are four main steps to create a cash budget for your business:

1. Define your time period

You need to decide at the outset what period of time your cash budget will cover. Most businesses maintain budgets monthly, quarterly, and/or annually. Working with a defined time period lets you estimate cash inflows and outflows.

Without a defined time period, you have no way of knowing what the amounts of cash inflows and outflows will be.

2. Decide your desired cash position

Your desired cash position is the total amount of cash you want your business to have at the end of your selected time period. Your desired cash position is also called your ending cash balance. Thinking back to our roadmap analogy, in order to make a cash budget, you have to know what your destination is. Your desired cash position is your destination for that time period.

Once you know your destination, you can then move to the third and fourth steps below.

3. Estimate cash inflows

Cash inflows are also called income, sales, and receipts. These are the different types of incoming cash your business will receive within your defined time period. Examples include cash sales, AR collections, and miscellaneous income.

When estimating cash inflows, be as realistic as possible. Try not to be overly pessimistic nor overly optimistic.

4. Estimate cash outflows

Cash outflows are also called expenses and payments. Cash outflows represent different types of expenses your business will incur during your defined time period. Examples include expenses for raw materials, payroll, advertising, equipment, and many other types of expenses.

When estimating expenses for your defined time period, keep in mind your desired cash position. Remember, your desired cash position is where you want to be after all these expenses have been estimated. In order to meet your desired cash position at the end of the time period, you may need to cut expenses in certain areas that you are not accustomed to doing.

If you expect a noticeable increase in cash inflows during the time period, you may need to increase your estimates for certain expenses in order to fulfill these additional sales. For example, if you expect to sell 10% more product units during the time period, you may need 10% more raw materials to fulfill those additional product sales.

By defining your time period, deciding your desired cash position, and reconciling your estimated cash inflows and outflows back to your desired cash position, you now have a completed cash budget!

Where to from here?

Now that you understand what cash budgets are, why they’re important, and how to create them, the next step is to implement cash budgeting discipline in your business.

One of the main advantages of maintaining cash budgets is the window or visibility they provide into cash flows. With visibility into company cash flow, you can make better cash management decisions.

Spendesk makes business budgeting and cash flow management simple. CFOs and Finance Directors don't have the time to monitor cash on a granular level. But with our smart payment methods and built-in budgets, you get full visibility over company spending in just a glance. Which saves an enormous amount of time and angst.

Whether expenses are paid by card, invoice, or cash, you always know exactly how much budget is left in real time. Creating and managing cash budgets has never been easier.