Cash budgeting & forecasting

This post has been produced by B J Harford FCCA, FIAB, Principal at Woodgrove Tutorials

Woodgrove Tutorials is an IAB Accredited Training  Provider. Their  Principal, Brian J Harford FCCA is an Award Winning qualified Accountant with 36 years teaching experience in Bookkeeping & Accounts including 17 years as a Part Time Lecturer at the London Metropolitan University (formerly Guildhall University)

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Cash flow is the life blood to all businesses especially new ones which are particularly cash sensitive.

It is important for a business to be able to project how its current cash resources will profile over a given period. This forecast cannot be accurate  because the various items which go to make up the cash budgets will be based on estimates. However it is better to plan ahead than not to do so and, with experience predictions of costs and revenues will become more accurate. The Cash Budget will identify when cash shortages may occur and armed with this knowledge the owner of the business can make suitable arrangements. Specifically, this can mean that the potential provider of Finance can be approached and a Finance  facility arranged. The Lender is sure to look more favourably on the request if it is supported by a professionally produced cash forecast for the next (say) twelve months of trading.

Preparing the Cash Budget

It is important to always remember that the Cash Budget relates to the movement of cash. It differs from the Profit and Loss Account insomuch as it is concerned with cash inflows and outflows. For example, if rates of £15,000 are paid for fifteen months the full cash outlay will appear in the Cash Budget whereas only £12,000 (the charge for the year) will appear in the Profit and Loss Account.

Another example is the acquisition of a fixed asset (say for £100,000). This will appear in the Cash Budget as an item of outgo but in the Profit and Loss Account only the depreciation (say 10% x £100,000) charge will appear.

Format of the Cash Budget

The Cash Budget should show:­

(i)    Opening Balance – available cash resources at the start of the period.

(ii)   Receipts – from sales, investments, rent receivable etc on a month by month basis

(iii)  Payments – to creditors for purchases, payments of all running expenses on a month by month basis.

(iv)  Balance for the month i.e. the surplus of cash receipts over cash payments or the excess of payments over receipts.

(v)   Closing Balance i.e. the year to date cumulative balance existing at the end of each month which includes all previous balances.

To illustrate the format an example of simple Cash Budget follows:­


Oct         Nov          Dec       Total
£            £             £          £
Opening Balance                                  1,000                                  1,000


Sales                                            4,000       5,000     8,000    17,000

Other                                           1,000       1,000     1,000      3,000
Total Receipts                               5,000       6,000     9,000    21,000


Purchases                                    (2,000)   (3,000)  (4,000)    (9,000)
Rent                                                           (2,000)                  (2,000)
Wages                                             (500)      (500)     (500)    (1,500)
Office Expense                              (1,500)   (1,500)  (1,500)    (4,500)
Purchase of a Fixed Asset                            (2,000)                  (2,000)

Total Payments                             (4,000)   (9,000)    (6,000)   (19,000)

Monthly Balance                                     2,000     (3,000)      3,000 2,000

     Closing Balance                                    2,000    (1,000)       2,000 2,000


(i)   For month one the opening balance of £1,000 is included in the closing balance of £2,000. This comprises:-

Opening Balance                         1,000
Receipts                                      5,000
Payments                                   (4,000)

Closing Balance                           2,000

(ii)  The closing cumulative balance will, for month one, always be the same as the monthly balance because at this stage the monthly and cumulative balances are the same as both represent the movement for the first month. Thereafter the cumulative balance represents the balance after two months, three months etc etc.

(iii) All payments have been bracketed to highlight the fact that they are outgoings.

(iv) The total column is very important because it acts as a check on the final closing balance of £2,000. If the balance in the total column came to anything other than £2,000 then an adding up error, either vertically or horizontally, would have occurred.

Interpretation of the Cash Budget Statement

As stated earlier, the results shown by the statement are not actuals, they are the best guess of how financial events will profile during the first three months of trading. The quality of the input reflects the quality of the output. If correct and detailed research has been carried out then the result will be far closer to what will actually happen. If projections have simply been thrown together without much thought or research then the actual result will probably not resemble the Cash Budget predicted results.

If the Cash Budget has been carefully prepared and all known items of income and expenditure have been included then the owner of the business can identify how and when cash shortfalls (or surpluses) will arise. For example, in the above illustration the owner of the business can see that in month two (November) he expects to be in an overdraft position. In anticipation of this he can approach his bank manager with his carefully prepared cash flow projections and request an overdraft facility to tide him over the period when the cash deficit occurs.

CASH BUDGETS –  A fully worked example

The previous example illustrates the layout of the Cash Budget but it is too simplistic as it assumes that all purchases and sales are on a strict cash basis. Also stock holdings are ignored. This represents an unlikely business situation. A more comprehensive example now follows:-

A. Trader starts business on 1st Jan 2015 with £10,000 of his/her own money. A Trader also borrows £10,000 from a relative who wishes to help get the business up and running.

During the first five months of trading the purchases and sales were as follows:-

Purchases               Sales
£                     £
January                          6,000            12,000
February                        7,000            14,000
March                            8,000            16,000
April                         10,000            20,000
May                             12,000             24,000

43,000            86,000


(i)    All purchases and sales are on a credit basis with creditors allowing A. Trader one month credit and A. Trader allowing their debtors two months credit, i.e. creditors are to be paid one month following the month of purchase and debtors will pay two months following the month of sale.

(ii) A Trader allows debtors to take discount provided they pay within two months from the month of sale. The total discount taken by the debtors is as follows:­

March  1,000      (relating to sales made in January)
April    2,000      (relating to sales made in February)
May     2,000      (relating to sales made in March)

(iii)  In addition to the purchases shown Mr Trader is to purchase (in January) an initial stock of £5,000. This purchase is to be on the same basis as the main purchases. This stock is to be held in the business at a value of £5,000.

(iv)  In March six months’ rent amounting to £6,000 is to be paid.

(v)   In March a motor van is to be purchased for the business at a cost of £10,000. A Trader intends to depreciate this asset over the next 50 months.

(vi) Wages are to be paid at the rate of £4,000 per month.

(vii)   General expenses are to  paid at a rate of £3,000 per month. These are to be paid in the month following that during which they are incurred.

(viii) The owner of the business plans to take drawings of £1,000 per month.


Before preparing the Cash Budget it is worth working out the cash inflows and outflows in relation to sales and purchases as follows:-


Purchase                      Payments to      Creditors at
Purchases         of Stock        Total        Creditors          31st May
Month               £                 £                 £               £                   £
January         6,000           5,000        11,000
February       7,000                              7,000       11,000
March           8,000                              8,000         7,000
April            10,000                            10,000         8,000
May             12,000                            12,000       10,000

43,000          5,000         48,000       36,000             12,000 *

This represents the May creditors to be paid in June.*


Discount    Net amount      from           Debtors
Month         Sales          Allowed           Due          Debtors       at 31st May
£                  £                 £                 £                   £
January    12,000           1,000        11,000
February  14,000           2,000        12,000
March      16,000           2,000        14,000         11,000
April         20,000                            20,000         12,000
May          24,000                            24,000         14,000

86,000          5,000         81,000         37,000           44,000**

**This represents the sales for April and May which are to be paid for in June and July respectively.

The Cash budget for the first 5 months of 2015 will appear as follows:-















Opening Balance





















Motor van










General Expenses











Total payments











Monthly balance






Cumulative balance







The cash budget shows that the overdraft peaks at £32,000 in May 2015 and would start to reduce in subsequent months as sales build up and the differential between the lead time taken to receive money from debtors (two months) and that taken to pay creditors (one month) is made up by the gross profit margin. The gross profit margin means the mark up that the trader makes on his purchases. The total purchases (excluding stock) cost £43,000 but have a sales value of £81,000 after allowing for discounts.

So in this instance Finance of at least £32,000 would need to be arranged and a repayment profile agreed with the lender.

Woodgrove Tutorials, is an IAB Accredited Training Provider

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