How to Create a Cash Budget That Works for You

A cash budget is the best tool for small business owners to make sure they have enough cash on hand to meet their business needs in the near future.

Small businesses know that managing cash flow is essential to growing their business. Creating a budget within a time frame and sticking to it, on the other hand, is an integral part of their capital expenditures.

cash flow budget

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In this article, we will teach you:

  • What is a cash budget
  • Importance of creating a cash budget
  • How to create a cash budget
  • What alternatives can help you keep track of your income.

Also, we will go over the example of a cash budget plan and show you what it takes for businesses like yours to create an effective financial strategy. Even if you are not a business owner, managing cash receipts and cash payments will improve your finances significantly.

If that sounds interesting and helpful – keep reading below.

What Is a Cash Budget?

A cash budget is the best tool for small business owners to make sure they have enough cash on hand to meet their business needs in the near future. It will help you track your cash flow every month, so you can make sure you have enough money coming in to cover your costs.

It is a financial plan that shows the sources and uses of cash over a specific period, usually 30 days. If the business faces seasonal variations, it can be made every week. If your company has a stable cash flow, you can get away with creating a yearly cash budget that will be reviewed every month to check whether financial goals have been met.

Cash budgets help you monitor your finances and manage them effectively. In other words, it allows you to see whether your company will be able to pay off debts and avoid financing issues and check how much cash is available at any given time.

It should be noted that the cash budget takes into account only transactions with cash, without credit sale, and expenses in which there is no exchange of money.

Short-Term Cash Budget

A short-term cash budget is the best tool for managing cash flows since it considers sales and operating expenses within a month.

Short-term cash budgets can be prepared on a weekly or monthly basis. Many small businesses prepare a cash budget on a monthly or quarterly basis, as it is

They take into consideration utilities, rents, payrolls, and similar expenses.

Long-Term Cash Budget

A long-term cash budget is used to manage your cash flow for a more extended period of time, such as three months or more.

Tax payments and investments have to be considered when creating long-term cash budgets.

As they are more comprehensive, they require detailed and strategic planning.

How Does a Cash Budget Work?

These three financial statements are the main components of cash budgets:

  • Income statement: provides information about your company’s income and shows its source;
  • Balance sheet: shows the company’s assets, liabilities and equity;
  • Cash flow statement: provides information about the company’s inflows and outflows.

By predicting cash inflows and cash outflows, the company can quickly assess whether it is liquid to operate and necessary to increase capital.

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The ending balance or closing balance gives insight into the cash needs, and the opening balance or cash balance for the rest of the year is adjusted accordingly.

Why Is It Important to Have a Cash Budget?

Whether your business is cash invasive or not, it can benefit from thorough cash budgeting.

Here are some of the critical benefits of having cash budgets.

They Make Planning Easier

Companies use cash budgets to improve their planning. Knowing cash inflows and outflows makes it easier to choose suitable investments or avoid a cash crisis.

Cash budgets will highlight cash deficits and periods of the year in which excess cash is present. All actions can be planned accordingly, and companies can adjust general and administrative expenses to maintain liquidity.

Furthermore, cash budgets highlight monthly expenses, thus allowing financial advisors to create a plan to reduce them or spread them over a few months.

With a strategically made cash budget, you will know on time whether it will be necessary to apply for bank loans and avoid possible extra costs for submitting a loan request at the last minute.

It Is Easier to Track Seasonal Variations

Cash budgets especially come in handy for seasonal businesses, with periods of significant cash inflows and cash outflows.

While the financing budget may be overall positive, cash deficits during a few months of low sales can cause debt, while carefully created cash budgets can prevent a lack of cash.

Additionally, it will make it easier to plan future investments. Cash surpluses should not be wasted but turned into a profit. If you do not want to make any investments in the following few months, you can use the extra cash to pay off debt.

They Help You Establish Your Brand

Cash surplus can also be used to create better relationships with suppliers and customers by paying your duties on time. Good cash management helps build the brand, which results in even more profits.

How to Create a Cash Budget?

As stated, cash budgets should be created strategically, so make sure that you have the latest bank statements from last month or so because those represent how much money you are making right now.

Here is a step-by-step guide on preparing a cash budget.

Choose a Template

You can use a cash budget spreadsheet or online software. Excel is a great tool, as it has many customization tools. If you already use accounting software, check whether it has a budgeting feature.

Set the Time Period

Setting the time frame for which you want to track finances is the first decision. You are the one responsible for choosing an adequate time period for your company.

Do you need short-term or long-term cash budgets?

Keep in mind that the set time period should be realistic. Tracking cash flows for over a year is quite tricky, as it is almost impossible to make predictions for such a long time period.

If your business is doing well and there is already a cash surplus, you can create long-term cash budgets, in which you will check cash inflow and outflow after every quarter.

Some companies are creating weekly cash budgets. However, this requires more work, and it may be best to start with a monthly one.

Set the Beginning Balance

The cash budget requires identifying the beginning balance, and the easiest way to do so is by checking the previous month’s ending balance or quarter. You can include savings in the beginning balance as well. Additionally, make sure that this amount is tied to a bank statement or another source.

Set the Target Cash Balance

Cash balances may fluctuate during the single accounting period. Make sure to put some money aside if the situation gets tough and your company struggles with liquidity. The recommended amount is equal to three months expenses. Managing cash balances in this way can help significantly in the future period.

Identify Sources of Cash Inflow

A cash balance should reflect actual cash inflows. Go over all documents to make sure that all sources of inflow are included. This means cash collections, accounts receivable and expected cash receipts generated from sales such as credit sales, cash sales, future sales, assets, and stocks to be sold.

Accounting software can help you identify sources of inflows for your cash balance, but you can not rely only on them. The beginning cash balance and inflow make up the total cash of the business. It is in your best interest to grow the total cash of your company.

Identify Sources of Cash Outflow

Next, you will have to name all of the sources of outflows: purchases that have to be made, maintenance, salaries, rents, utilities, selling expenses, administrative expenses and other direct expenses, interest payments, etc. Other expenses may occur based on your business model.

Prepare a Cash Flow Statement

Once all information is put in the software, create a cash flow statement and analyze it. Monthly statements will give you a clear insight into your company’s cash flows.

Estimate the Cash Flow

By reducing the expenses from cash inflow sources, you will get a net cash position which will help you better understand how is your company spending money.

If you are in a deficit, you should go back to cash expenses and check whether all of them are necessary.

The cash surplus means that the proposed plan is good, and you can plan when to make the next investment to make more profit.

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Example of a Cash Budget

The best way to learn how to make a cash budget is by using an example, so look at the one below:

Cash Outflows

  • Salaries – $3,000
  • Utilities & office expenses – $1,200
  • Rent expense – $2,400
  • Insurance – $500
  • Maintenance and repairs – $200
  • Accounting fees – $300
  • Total outflows:  $9,900


Cash Inflows

  • Revenue – $10,000
  • Stock sales – $1,200
  • Total inflows:  $11,200
  • Beginning cash balance:  $11,200 ($10,000 + $1,200)

Net cash position:   $1,000 ($11,200 – $9,900)

As you can see from the example above, outflows are lower than inflows, meaning a cash inflow. Although it may be hard to predict the cash balance, you can see that the company is making a low profit and might face struggles in the next period.

To get out of the situation, find ways to reduce expenses and increase revenue. This will gradually improve finances within the company.

Do You Need Cash Budgets?

Budgeting is vital to every business to help it grow. A cash budget will help you know where your money is coming and going so that you can plan your cash flow for your business. It will also help you make better financial decisions.

If the process of creating cash budgets seems too complex, the Infinite Banking concept might help you manage your finances in a better way.

The Infinite Banking Concept

The Infinite Banking Concept is a financial strategy that helps individuals like you build true financial independence and grow their wealth. It also helps business owners manage their cash flow and finance in general.

Infinite Banking teaches you to use your whole life insurance policy to finance your expenses and make investments.

There are three steps to set up the Infinite Banking system:

  1. Find a whole life insurance company that meets your specific needs and goals.
    You want to choose a whole life insurance company that is consistent and reliable regarding annual dividend payments.
  2. Make sure your policy is eligible for policy loans.
    Non-direct recognition policy loans are ideal.
  3. Your policy must be a blended, over-funded, and high-cash value policy.
    It is always best to speak to your life insurance agent to see what structure makes sense for you.

The good news is that we can help you with the entire process: from building a policy to using it to maximize your wealth. Read our final thoughts to learn how to join our students on a quest to true and lasting financial freedom.

Final Thoughts

A cash budget is a plan that helps you keep track of where your money is coming from and going. It can help highlight any potential problems with your current spending habits or help you find opportunities to save money each month.