What it means
A profit budget shows whether the company expects to earn money, while a treasury budget shows whether it will have cash on the right day. A business can be profitable on paper and still run out of cash if customers pay late or a big loan payment falls due.
The main building blocks are cash receipts, cash payments, debt repayments, interest, tax, dividends and capital spending. These are mapped by week or month, so the treasurer can spot a shortfall before it arrives.
The budget also includes financing and risk lines. It sets out planned borrowing, expected interest cost, the use of bank facilities, cash held in different currencies and any hedging (contracts that fix a future rate) the company intends to use.
Treasury teams use it to set a minimum cash buffer. If forecast cash falls below the buffer, the team can arrange a loan, delay a payment, speed up collections or draw on a credit line.
A strong treasury budget links with sales, purchasing and capital plans. When the commercial teams change their assumptions, the treasurer needs to update the cash forecast, because small timing changes can create large funding gaps.
Accuracy improves with regular comparison of forecast and actual results, and with honest assumptions about how fast customers really pay. A variance review each month shows where the assumptions were wrong, such as customers paying 10 days later than expected, and helps the next forecast.
In practice
Real-world examples.
Example
A retailer builds a weekly treasury budget before the holiday season. It sees that stock purchases in September will drain cash weeks before sales arrive, so it arranges a seasonal credit line in advance. The treasurer also schedules supplier payments to fall as late as the terms allow.
Example
A manufacturer with customers in Europe forecasts euro receipts for the next 12 months. The treasury budget shows the expected exposure, and the treasurer decides to hedge half of it using forward contracts. Leaving the other half open keeps some benefit if the euro strengthens.
Example
A software start-up uses a treasury budget to see how many months of cash it has left. The forecast shows that cash will run below the minimum buffer in seven months, which prompts an early fundraising conversation. The founders also cut two planned hires to extend the runway by a month.
Formula
Calculation
The core calculation is the funding need or surplus for each period:
Closing cash = Opening cash + Cash inflows - Cash outflows
Funding need = Minimum cash buffer - Closing cash, if positive
An illustrative company opens a quarter with $400,000 of cash, expects $1,200,000 of receipts and plans $1,500,000 of payments including debt service. Closing cash is $400,000 + $1,200,000 - $1,500,000 = $100,000. With a required buffer of $250,000, the funding need is $250,000 - $100,000 = $150,000, so the treasurer should arrange at least a $150,000 draw on a credit line or a delay in spending.Case study
Seen in the real world.
Calloway Components is an illustrative, fictional engineering company with annual sales of $60,000,000. The business was profitable, but the finance director kept being surprised by short-term cash squeezes, and had twice used an expensive overdraft. The bank had noticed and asked for explanations at the last review.
She introduced a rolling 13-week treasury budget, updated each Friday. The sales team supplied expected payment dates for large customers, purchasing supplied supplier due dates, and the plant manager supplied capital spending timing. A simple spreadsheet pulled the figures together and compared each week with the one before.
Within three months, the budget had predicted a $700,000 shortfall in week nine, caused by a loan repayment and a large tax payment falling in the same week. In this illustrative case the company negotiated a short extension of the tax payment and drew on a low-cost facility, avoiding the overdraft and saving thousands of dollars in interest.
Watch out
Common mistakes.
- Using the profit budget as a cash forecast, when timing of receipts and payments can differ greatly from revenue and expenses.
- Forgetting debt repayments, tax and dividends, which often cause the largest cash gaps. These items are lumpy, so they should be placed in the exact week they fall due.
- Not comparing forecast with actual results, so the same errors are repeated.
Questions
People also ask.
What is the difference between a treasury budget and a cash flow forecast?
A cash flow forecast predicts movements of cash, while a treasury budget adds the planned funding, investment and risk-management decisions that go with them.
How often should it be updated?
Many firms update it weekly or monthly, with a rolling forecast that always looks ahead by a fixed number of weeks or months.
Who prepares it?
Usually the treasurer or finance team, with input from sales, purchasing, operations and tax. Smaller firms often give the job to the finance manager or the owner.
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