What is a cash budget? Definition, importance, and benefits

How does your business make sure it has enough cash on hand to meet its upcoming financial obligations?

The most forward-thinking organizations use a cash budget to estimate incoming and outgoing cash and ensure healthy liquidity.

In this article, we’ll explore what a cash budget is, the key components involved, and why you should be creating and reviewing them on a regular basis.

What is a cash budget?

A cash budget is a financial planning tool that estimates a business’s incoming and outgoing cash over a specific timeframe to maintain healthy liquidity. It details the starting cash balance, projected receipts, and planned payments to determine the ending balance.

With this forecast, companies can confirm they have enough cash to meet operating needs, identify potential shortfalls or surpluses early, and make proactive decisions around expenses, savings, investments, or financing.

Key components of cash budget 

A well-prepared cash budget includes these five key elements, all of which help provide a clear picture of a company’s cash position:

1. Opening cash balance: The amount of cash available at the start of the budgeting period, carried over from the previous period.
2. Cash inflows: All expected sources of incoming cash, such as payments from customers, asset sales, investment income, or loan proceeds.
3. Cash outflows: All anticipated payments, including operating expenses, supplier invoices, salaries, taxes, loan repayments, and capital expenditures.
4. Net cash flow: The difference between expected inflows and outflows of cash during the period in question, showing whether the business expects to see a cash surplus or deficit.
5. Closing cash balance: The ending balance after accounting for all inflows and outflows, which becomes the opening balance for the next period.

When assessed in conjunction, these key components help organizations track liquidity, plan for funding needs, and maintain financial stability.

How to create a cash budget 

Creating a cash budget is fairly straightforward:

1. Determine the opening cash balance: Begin with the amount of cash available at the start of the budgeting period (pulled from your bank feed or accounting platform).
2. Project cash inflows: Estimate all incoming cash, such as customer payments, interest income, asset sales, and financing proceeds. Use realistic assumptions based on sales forecasts and historical patterns.
3. Project cash outflows: Identify any upcoming payments planned, such as wages, rent, loan repayments, taxes, and general operating expenses. Make sure to consider possible seasonal fluctuations and upcoming one-off expenses.
4. Calculate net cash flow: Subtract total cash outflows from total inflows to determine whether you’ll have a surplus or a deficit during the period.
5. Calculate your closing cash balance: Find your expected ending cash balance by adding net cash flow to your opening balance. This will reveal whether your cash position is sufficient to meet your upcoming obligations.
6. Add a cash buffer: Lastly, it's a good practice to set aside an extra safety margin to cover unexpected expenses or revenue delays. This buffer helps maintain liquidity and reduces the risk of cash shortfalls.

Benefits of cash budgets 

Why invest time in preparing cash budgets?

These are the benefits you’ll receive in return.

Improved cash flow management

Businesses use cash budgets to anticipate shortages, avoid liquidity crises, and plan for surpluses more effectively. 

Better financial decision-making

Cash budgets help leaders make informed choices about spending, investments, and financing based on projected cash positions rather than guesswork.

Enhanced operational planning

When teams understand future cash availability, they are better prepared to schedule purchases, manage inventory, and plan hiring or expansion with confidence.

Early identification of funding needs

Spotting potential shortfalls in advance gives businesses time to arrange credit facilities, adjust expenses, or accelerate collections.

Greater accountability and control

Comparing actual results to the budgeted figures you create during the cash budgeting process highlights variances, which supports more disciplined financial management and encourages accountability across departments.

Support for long-term growth

Consistent cash budgeting helps sustain operations, build reserves, and create the financial stability needed to pursue strategic opportunities.

Why is a cash budget important? 

A cash budget plays a central role in a company’s financial health and day-to-day management. It helps leaders plan effectively, make informed decisions, and maintain stable liquidity.

The role of the cash budget in financial planning

A cash budget forms the foundation of both short-term and long-term financial planning.

It aligns projected cash flow with business goals, ensuring funds are available for operations, investments, and growth initiatives.

When businesses accurately forecast cash needs, they can better schedule expenses, plan capital purchases, and allocate resources efficiently.

The impact of cash budgeting on business operations and decision-making

Cash budgets give management a clear view of when and where money moves through the business.

This visibility supports smarter decisions (such as when to hire, launch new projects, or delay expenditures) and helps maintain operational continuity even during slow revenue periods.

How cash budgets support liquidity management 

Liquidity determines a company’s ability to fulfil its short-term obligations. Cash budgets track expected inflows and outflows, revealing potential shortfalls early and allowing businesses to adjust spending, accelerate collections, or secure financing before cash flow issues arise.

Short-term vs. long-term cash budgets 

Cash budgets can be prepared for different timeframes, depending on the level of detail and the goals of financial planning.

You can choose any time period that suits your company, but for most business purposes, cash budgets can be separated into two categories: short-term and long-term.

Short-term cash budgets

Short-term cash budgets typically cover periods ranging from one month to a year.

They focus on day-to-day liquidity management, tracking incoming and outgoing cash to make sure the business can meet its immediate obligations.

Short-term cash budgets are ideal for managing working capital, monitoring cash flow fluctuations, and maintaining control over near-term spending.

Long-term cash budgets

Long-term cash budgets extend beyond a year. They’re used for strategic planning, such as forecasting future cash needs for expansion, equipment purchase, and debt repayment.

These cash budgets are most useful for assessing financing requirements, setting growth targets, and aligning cash flow with long-term business objectives.

Cash budget example 

Let’s explore how cash budgets work with a fictional example.

Consider a small manufacturing business, Brightwood Furniture, that produces custom wooden tables. The company wants to prepare a three-month cash budget to ensure it can cover production costs and maintain liquidity during a seasonal slowdown.

Here’s how that would work:

1. Find the opening balance

At the beginning of April, Brightwood has an opening cash balance of $25,000.

2. Project cash inflows

Brightwood anticipates incoming customer payments to amount to $40,000 in April, $350,000 in May, and $55,000 in June. Additionally, it expects a $10,000 loan disbursement in May to help fund material purchases.

3. Project cash outflows

The business has monthly operating expenses totaling about $30,000 per month. Material costs look a little different each month due to fluctuating order volumes, with projections amounting to $20,000 in April, $25,000 in May, and $15,000 in June.

4. Calculate net cash flow 

Next, Brightwood performs the necessary calculations to find the net cash flow for each month:

• April: inflows $40,000 – outflows $50,000 = –$10,000
• May: inflows $45,000 – outflows $55,000 = –$10,000
• June: inflows $55,000 – outflows $45,000 = +$10,000

5. Calculate closing balances

Then, the finance team calculates the closing balances for each month:

• April closing balance: $25,000 – $10,000 = $15,000
• May closing balance: $15,000 – $10,000 = $5,000
• June closing balance: $5,000 + $10,000 = $15,000

6. Add a cash buffer

Brightwood maintains a $5,000 buffer to cover unexpected costs or late customer payments, ensuring liquidity even during lean months.

This simple cash budget helps Brightwood see that May will be tight. With this insight, management can delay a non-essential equipment purchase or speed up receivables to stay above its minimum cash threshold.  

Common mistakes to avoid when creating a cash budget 

Even a well-structured cash budget can fall short if key details are overlooked. Avoid these common pitfalls to ensure accuracy and reliability:

• Relying on overly optimistic sales or collection assumptions, which often lead to unrealistic projections 
• Failing to account for irregular or seasonal costs, such as equipment maintenance or tax payments 
• Recording income when the invoice is received rather than when paid, which distorts actual cash availability
• Not maintaining a cash reserve for unforeseen costs or delayed payments 
• Failing to update the budget regularly when market changes, new contracts, or expense shift demand it
• Neglecting to compare actuals with forecasts to analyse variance and identify where projections are misaligned 

Avoiding these mistakes ensures your cash budget remains a reliable tool for managing liquidity and supporting sound financial decisions.

Manage cash flow with BILL

A well-prepared cash budget gives you the clarity to make confident financial decisions, manage liquidity, and keep projects moving without disruption. It turns short-term forecasting into a proactive tool for long-term stability.

BILL’s integrated financial operations software helps businesses streamline and automate their cash budgeting process, combining visibility, control, and accuracy in one place.

With BILL, you can:

• Set and monitor spending limits to stay within budget
• Track real-time cash inflows and outflows across departments or projects
• Generate reports that simplify forecasting and improve financial decision-making

Get started with BILL today.

Frequently asked questions

What are the 4 types of budget?

The four core types of budget are:

1. Operating budget
2. Cash budget
3. Capital budget
4. Master budget

Each serves a different purpose. For instance, the cash budget tracks liquidity, while the capital budget helps plan investments.

How does cash budgeting work?

Cash budgeting projects cash inflows and outflows over a set period to show expected liquidity. By comparing receipts and payments, businesses can plan for surpluses, shortfalls, and financing needs.

What is the basic format of the cash budget?

The standard cash budget format looks like this:

• Opening balance
• Cash inflows
• Cash outflows
• Net cash flow
• Closing balance 

What is another name for cash budget?

Cash budgets can also be referred to as cash flow forecasts or cash flow budgets.