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Cash Budgeting and How to Use it

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Cash Budgeting and How to Use it:

Within the broad category of business budgeting, the owner of the small business may want to do some specialized budgeting with regard to cash flow. One type of budget that is practically necessary to the survival of the business firm is cash budgeting.

Short-term financial planning

The cash budget is one of the primary tools used in short-term financial planning in order to plan for cash flow. It is often developed on a month-by-month basis. A good cash budget allows the owner to see short-term financial needs and opportunities for the business. One month, the firm may have extra cash and may be able to save some money in a money market fund or take advantage of a bargain in the marketplace. Another month, the firm may have a shortfall and have to withdraw some money from savings or even apply for a short-term bank loan to cover its needs.

You can see by looking at this explanation of a cash budget how owners state their expected cash inflows (sales revenues) and outflows (expenditures) on a month-by-month basis in order to calculate their excess cash or cash shortage at the end of each month. This is an extraordinarily helpful short-term planning tool for the small business owner.

Financial Forecasting

Cash budgeting is the second step in the firm's financial forecasting process.

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