Cash Budget: Structure, Formula and a Worked Example

A cash budget sets out every expected receipt and payment per period, so the closing bank balance of each week or month is known before it arrives. The arithmetic is trivial: opening balance plus receipts minus payments. The difficulty sits in the timing, never in the formula.

For a controller this answers a different question than the profit plan does. A company can plan a profitable year and still run tight in March, because the VAT payment, the holiday allowance and a replacement investment all land in the same weeks. Profit is an accounting concept that allocates income and expense to the period they belong to; liquidity is a date on a bank statement.

What a cash budget is, and what it is not

This plan covers money movements, not performance. That makes it fundamentally different from the two documents it gets confused with most often:

• The profit and loss budget plans revenue and cost in the period they are earned or consumed. Depreciation appears in it; the payment for the machine does not.
• The cash flow statement explains after the fact how the balance changed. It looks back; a cash budget looks forward.

The bridge between the two is working capital: revenue growth entirely on credit raises profit and lowers the bank balance. The mechanics behind that are set out in calculating working capital.

How to build a cash budget

Closing balance = opening balance + expected receipts − expected payments

You repeat that formula per period, where the closing balance of one period becomes the opening balance of the next. In practice, building the schedule takes six steps:

1. Pick the interval and the horizon: weekly for twelve to thirteen weeks, monthly for twelve months. An annual plan in quarters hides exactly the peaks that matter.
2. Fix the opening balance: the bank balances of every entity plus the headroom left in the overdraft facility.
3. Convert the revenue plan into receipts using a payment term. At a DSO of 45 days, January revenue mostly arrives in March.
4. Convert the cost plan into payments and give each cost type its own rhythm: payroll around the 25th, suppliers at 30 days, rent quarterly in advance.
5. Add the items that never appear in a profit plan: VAT, payroll tax, corporate income tax, loan repayments, capital expenditure, dividends and holiday allowance.
6. Set the result against your credit headroom and against the covenants agreed with the bank.

Direct or indirect method

Two routes lead to the same figure.

The direct method adds up expected receipts and payments themselves, usually from open receivables and payables plus a schedule of fixed costs. It is accurate over a short horizon and forms the basis of a 13-week cash flow plan.

The indirect method starts from the budgeted result and corrects for depreciation and for movements in balance sheet positions. That route suits a horizon of a year or longer, because it hangs directly off your profit and balance sheet plan. Smartbooks derives cash flow this way: you plan the profit and loss statement and the balance sheet, let the result flow into equity through the profit reserves, and make liquid assets the balancing item for all other balance sheet movements. Receivables and payables can be driven by a DSO or DPO metric, so working capital moves along with the plan automatically. Every change in the assumptions then feeds straight through to the cash budget.

Worked example

A trading company with a € 250,000 overdraft facility plans the first quarter as follows.

Item	January	February	March
Opening balance	€ 250,000	€ 300,000	€ 255,000
Receipts from customers	€ 480,000	€ 410,000	€ 445,000
Operating payments	€ 430,000	€ 455,000	€ 374,000
VAT payment	–	–	€ 96,000
Capital expenditure	–	–	€ 120,000
Closing balance	€ 300,000	€ 255,000	€ 110,000

Across the quarter, € 140,000 more leaves the account than comes in, while the profit plan shows a gain. The difference sits in the € 96,000 VAT payment and the € 120,000 investment: two items that barely touch the result. The low point of € 110,000 stays inside the facility, though the margin is thin enough to consider moving the investment out by a month.

When is the outcome good enough?

There is no benchmark of the kind that exists for the current ratio, but three measures work in practice.

• The low point counts, not the closing balance. A year that starts and ends at € 250,000 tells you nothing if the series dips through zero along the way.
• The buffer. One to two months of fixed outgoings, freely available, is the common guideline. Capital-intensive and project-driven firms need more; subscription models billed in advance need less.
• The variance against actuals. Within roughly 5% over four weeks and 10% over thirteen weeks is workable. Structurally more than that means your assumptions on payment behaviour are wrong, not that the plan was too tight.

Test the outcome against your own loan documentation as well. Covenants differ per bank and per financing round, so no general rule of thumb applies. Run at least a base case alongside a scenario in which revenue falls 15% short and DSO stretches by ten days.

Pitfalls

• Treating revenue as a receipt. The January invoice is the March receipt. Without a payment term per customer group, the whole picture shifts forward by a month or more.
• Forgetting taxes. VAT, payroll tax and the corporate income tax assessment do not fall out of the profit plan, yet they are the largest single payments of the quarter.
• One balance for an entire group. Cash held in a foreign subsidiary is not freely available while there is no cash pool or while dividend restrictions apply. Plan per entity and only then add up.
• Never looking back. Without a monthly comparison of plan against actuals, you keep guessing at your own payment behaviour and that of your customers.
• Too coarse a grid. A monthly view hides that payroll leaves on the 25th while the large customer payment only arrives on the 5th of the following month.

Frequently asked questions

What is the difference between a cash budget and a profit plan?

The profit plan allocates income and expense to the period they belong to; the cash budget plans the moment money actually moves. Depreciation sits in the first and not in the second; a loan repayment or a VAT payment the other way round.

How far ahead should the plan run?

Two horizons side by side work best: thirteen weeks on a weekly grid for operational steering, and twelve months on a monthly grid for financing and investment decisions. The weekly version steers, the monthly version substantiates.

How often should it be updated?

Weekly for the short horizon, monthly at the close for the long one. More important than the frequency is that each round places the previous version next to actuals; that is where you learn how reliable your payment term assumptions really are.

Can it be done in Excel?

For a single entity, fine. With several entities, foreign currencies or a monthly reconciliation to the ledger it breaks down: the link to open items is missing, and every version is manual work that has to be checked again.

Start small: thirteen weeks, one entity, three receipt lines and six payment lines, and place the previous version next to the bank statements each week. To make the schedule move with budget and forecast rather than maintaining it separately, read the difference between planning, budgeting and forecasting first, then look at how budgeting and cash flow planning come together in one model.