The cash budget

The cash budget offers those in charge of the financial dependence of the company, a very broad perspective on the occurrence of cash inflows and outflows in a given period, allowing them to make the appropriate decisions about its use and management.

The cash budget or cash forecast, allows the company to program its short-term needs, the financial department of the company in almost all occasions pays attention to the planning of cash surpluses as well as to the planning of its deficits, since When obtaining remnants these can be invested, but on the contrary if there is a lack of planning how to look for short-term financing.

The fundamental factors in the analysis of the cash budget are found in the forecasts made on sales, those made with third parties and the organization's own, all the inputs and outputs of cash and the net cash flow will be explained below are their basic approaches.

Standardization:

The cash budget is projected to cover the period of one year, although any future period is acceptable.

The Sales Forecast

The fundamental input in any cash budget is the sales forecast, this is provided by the marketing department, based on this forecast, the monthly cash flows that will result from projected sales entries and related disbursements are calculated. production, as well as the amount of financing required to sustain the level of the production and sales forecast.

This forecast can be based on an analysis of both internal and external forecast data.

Internal forecasts:

These are fundamentally based on a structuring of sales forecasts through the company's distribution channels. The data from this analysis gives a clear idea of sales expectations.

External forecasts:

These are subject to the relationship that can be observed between the company's sales and certain economic indicators such as the Gross Domestic Product and the Available Private Income, these give a guideline on how sales can behave in the future. The data provided by this forecast provides a way to adjust sales expectations by taking into account general economic factors.

Cash Tickets:

Cash inflows include all cash inflows in any period of time, among the most common are cash sales, the collection of accounts receivable or credit and all those that in the short term are likely to represent a cash inflow.

The cash budget provides figures that indicate the ending cash balance, this can be analyzed to determine whether a deficit or surplus is expected.

Cash disbursements:

Cash disbursements include all those cash disbursements that are presented for the total operation of the company, in any period of time, among the most common are cash purchases, cancellation of accounts payable, payment of dividends, leases, wages and salaries, payment of taxes, purchase of fixed assets, payment of interest on liabilities, payment of loans and payments to sinking funds and the repurchase or retirement of shares.

The net cash flow, final cash and financing:

The net cash flow of a company is found by deducting each month the disbursements of the inputs during the month. By adding the beginning cash balance to the company's net cash flow, the ending cash balance in each month can be found and finally any financing necessary to maintain a predetermined minimum cash balance must be added to the ending cash balance to find a balance. cash end with financing.

Interpretation of the Cash Budget:

The cash budget provides the company with figures indicating the ending cash balance, which can be analyzed to determine whether a cash deficit or surplus is expected during each period covered by the forecast. The analyst and finance manager should take the necessary steps to request maximum funding, if necessary, indicating in the cash budget due to uncertainty in final cash values, which are based on sales forecasts.

Fundamental components

Sales Forecasts

Cash Tickets

Cash disbursements

Net cash flow, final cash and financing

Reduction of uncertainty in the Cash Budget

The net cash flow, the final balance of cash and financing.

The net cash flow is obtained by deducting each month the disbursements made by the company from the income obtained by the economic activity. Adding the beginning cash balance in the period to the net cash flow we obtain the ending cash balance for each month. Finally, any additional financing to maintain a minimum cash balance must be added to the final cash balance, to achieve a final financing balance.

So we have that for the month of September the final cash balance was $ 50,000 and it is desired to have a minimum cash balance of $ 25,000 during the following months. Based on the data collected above, we can make the cash budget for the ABC company, as follows:

Cash budget for company ABC
	October	November	December
Total cash inflows	$ 210,000	$ 320,000	$ 340,000
(-) Total disbursements	$ 213,000	$ 418,000	$ 305,000
Net cash flow	$ -3,000	$ -98,000	$ 35,000
(+) Initial cash balance	$ 50,000	$ 47,000	$ -51,000
Final cash balance	$ 47,000	$ -51,000	$ -16,000
(+) financing	$ -	$ 76,000	$ 41,000
Final balance with financing	$ 47,000	$ 25,000	$ 25,000