What it means
A cash flow budget starts with the opening cash balance and adds expected cash inflows, such as customer payments, loan proceeds and asset sales. It then subtracts expected cash outflows, such as wages, supplier bills, rent, tax and loan repayments.
The result is the closing balance for each period. It differs from a profit budget.
A profit budget includes non-cash items such as depreciation and counts sales when they are made, whereas a cash flow budget counts only the moment money moves. A business can plan a profitable year and still run short of cash in some months.
The budget is built from assumptions. Sales forecasts, customer payment times, supplier terms, seasonal patterns and planned purchases all feed into it.
Because the figures rest on estimates, it is wise to test them with best-case and worst-case scenarios. Its main use is spotting gaps early.
If the closing cash falls below a minimum level, managers can arrange a credit line, delay a purchase, collect faster or ask suppliers for more time. If cash is plentiful, they can plan to invest the surplus or repay debt.
Lenders often ask for a cash flow budget when reviewing a loan application, and boards use it to approve spending. It should be compared with actual results each month, and the differences investigated.
Over time, this improves the accuracy of the next budget. A rolling approach works well in practice.
Each month, the finance team drops the month just ended and adds a new month at the end, so the budget always looks a full year ahead. This keeps managers focused on upcoming cash rather than on a plan that went out of date months ago.
In practice
Real-world examples
Example 1
A toy company earns most of its revenue in the autumn. Its cash flow budget shows a deficit between February and July, when it buys materials and pays staff before sales arrive. The company agrees a seasonal credit line in advance. The budget also shows when the credit line can be repaid once autumn sales arrive.
Example 2
A consulting firm plans to hire three people in the next quarter. The budget shows the extra payroll of $45,000 a month will push cash below the minimum in month two. The partners decide to stagger the hires. The change keeps the firm safely above its minimum cash level.
Example 3
A charity budgets for grant payments that arrive twice a year. It sets out the expected dates and amounts, and plans its spending to ensure there is cash to pay staff in the gaps. The trustees review the budget at every meeting. The trustees can then see whether any cash is left to commit to a new project.
Think of it
A cash flow budget is your financial game plan-mapping out exactly when money should arrive and leave.
Formula
Calculation
Closing cash = Opening cash + Budgeted inflows - Budgeted outflows
Funding need = Minimum cash required - Closing cash (if positive)
Worked example: in March, a company opens with $50,000 of cash, expects $120,000 of customer receipts and plans $150,000 of payments. Management wants to keep at least $40,000.
Step 1: Closing cash = $50,000 + $120,000 - $150,000 = $20,000.
Step 2: Funding need = $40,000 - $20,000 = $20,000.
The budget shows a $20,000 gap, so the company should arrange extra funding or adjust its plans before March.Case study
Seen in the real world
Copperfield Catering is an illustrative, fictional business that planned to open a second kitchen. Its profit budget showed a healthy $180,000 surplus for the year. The finance manager also built a cash flow budget and found that equipment of $120,000 and a deposit of $30,000 would be paid in the first two months, long before the new kitchen earned money.
The budget showed cash falling to negative $60,000 in month two. The owners arranged a $100,000 equipment loan and negotiated 45-day terms with suppliers. Cash stayed above the minimum throughout the year.
The illustrative lesson is that a profitable plan can still run out of cash. A cash flow budget exposes the timing before it becomes a crisis. The owners now update the budget at the end of every month and share it with the bank, which has made the lender far more willing to support the next stage of growth.
Watch out
Common mistakes
- Assuming a profit budget is enough, when profit says nothing about the timing of cash.
- Assuming customers will pay exactly on time, when actual payment is often later than the terms say.
- Building the budget once and never updating it against actual results.
Questions
People also ask
How far ahead should a cash flow budget go?
Most businesses plan 12 months, with a more detailed short-term view for the next few weeks.
What is the difference between a cash flow budget and a forecast?
A budget is a plan to be met, while a forecast is an updated estimate of what is likely to happen.
Who prepares it?
The finance team usually builds it, with input from sales, operations and purchasing.
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