Definition of Cash and Capital Budget and How to Prepare It

Every company must have financial statements that are used to see how much profit it has earned. In addition, the company will also see what percentage of losses the brand has experienced. So it is necessary to make a record or report so that it can become evidence. Then, came the type of financial statements called cash. There is also a record that contains incoming and outgoing money which is then called the cash and capital budget.

Definition of Cash and Capital Budget

The definition of cash and capital budgets is interpreted as a tool used by companies to estimate cash flow. Where is the estimated amount of cash flow that will occur at a certain time or period. Thus, there is what is called an estimate that applies to the determination of cash flows, where this determination has the goal of knowing whether the company’s budget is sufficient or not.

This budget assessment will be tested and also managed so that it can provide certainty whether or not to meet the operational needs of a company. However, the use of the cash budget as a tool is only intended to estimate the funds needed within a certain period of time with the aim of meeting various company needs.

Management itself will usually develop a cash budget after the purchase, sales, and capital expenditure budgets have been completed. The budget needs to be prepared before the cash and capital budget to accurately estimate how cash will be affected over the period. For example, management needs to know sales forecasts before it can estimate how much cash will be raised during the period.

Management will use the cash budget to manage cash flow in a company. In other words, the management must ensure that the company has enough cash to pay bills when they are due. For example, payroll must be paid every two weeks and utilities must be paid monthly. The cash budget here allows management to predict short dips in the company’s cash balance and fix problems before payments are due.

Not only that, the tools used for cash estimates are also useful to find out whether the company has a shortage or excess of company operational funds. Where the excess of the money can be seen during the budgeting period. The purpose of this tool is to monitor the condition and condition of the company’s cash on an ongoing basis. Apart from that, cash budgeting can also help to measure the success of previously planned targets.

How a Cash Budget Works

The cash budget is a projection and as such it relies on other projections to provide a basis for its calculations. This reliance means that the accuracy of the cash budget will be determined by the accuracy of the information used to make the projections, with baseline data that is more accurate and allows you to more accurately project performance over a given time period. When calculating the cash budget, the first thing to do is identify the company’s cash flow needs as well as opportunities over the time period being assessed.

Typical forms of requirements include loan obligations, payments to stakeholders, as well as operational costs. Opportunities in one period include investment, new funding from loans, and also operating income. This cash budget is used as an important part of company planning, because it will show whether the company has enough available cash to cover costs in the period under review. A negative result from this cash budget assessment means that the company may not be able to cover operating costs if the projections are accurate and may need to take out a loan or seek additional financing options to make loans.

Cash Budget Method

The following are some of the types or methods that are in the cash budget, including:

1. Methods of Receipt and Payment

Using this method, the cash budget will be organized by column. There are two parts, where the first part is the receipt and the second part is payment. Total receipts are added to the opening cash balance and then subtracted from payments to obtain the ending cash balance. If receipts are more than payments, then there will be a cash surplus at the end of the month and vice versa.

2. Adjusted Profit and Loss Method

This method is also known as a cash flow statement. Where this type of budget is prepared for the long term. This will provide more details on income as well as expenses with regards to long term planning. Profit alone is considered to be equivalent to cash. Although cash receipts and payments are not a consideration, they only consider non-cash transactions to prepare a cash budget with this method.

Profits will be adjusted by adding back provisions, depreciation, stock, work in progress, receipt of capital, decrease in debtors, payment of capital, increase in creditors and by reducing dividends, increase in debtors, increase in stock and decrease in creditors. Then the profit to be adjusted is the final balance of cash. The information below is needed to prepare a cash budget under the adjusted profit and loss method.

– Expected opening balance.
– Net profit for the period.
– Changes in current assets and current liabilities.
– Capital receipts and capital expenditures.
– Dividend payments.

3. Balance Method

This method is very similar to the adjusted profit and loss method. With this method, all balance sheet items will be recorded on their respective sides except for cash. Then, the balance sheet will be balanced, if the liability side is heavier than the asset side. The balance figure itself is cash in the bank. Likewise, if the asset side is heavier than the liability side, the balance figure itself is an overdraft which is an extension of credit from the bank that is given when the balance in the account reaches zero.

How to Prepare a Cash Budget

Next is how to prepare the cash and capital budget. Where in the drafting process, several stages are definitely needed so that the budget can be properly structured. That means, the cash budget can be arranged according to what is expected by the company. Therefore, these stages must be known in advance. The following is how to prepare a cash budget through several stages, including:

1. Determine the Cash Flow Into the Company in One Month

This type of cash flow analysis is called preparation and also cash budgeting analysis. This is part of your company’s short-term financial forecast. Determine the amount of cash that will flow to the company within one month. If you are just starting a business, then you should have an initial balance in cash that you want to have each month.

Apart from that, a business also needs to determine the number of sales you will have during the first month. Those sales should include sales for cash as well as sales you make to customers who pay on credit.

2. Determine the cash flow out of the company in a month

A business will certainly have expenses every month. For example, a business needs to buy office supplies, stationery, pay for car maintenance, as well as fuel and employee salaries. Other monthly expenses include advertising and taxes. However, there are other expenses that occur occasionally. For example, buying computer equipment, vehicles, or other larger expenses.

3. Cash Inflows Must Be Greater Than Cash Outflows

Every businessman certainly wants the flow of money into the company to be greater than the amount of money coming out of the company. This means that the monthly cash inflows must be carefully planned as well as cash outflows must be minimized. Thus, you will have enough money to run your company.

4. The ending balance for the first month becomes the ending balance for the second month

One rule that is quite important and basic in making a cash budget is to enter the ending balance for the first month into the opening balance for the second month. Where every month you may have to add more items to the analysis as your business starts to grow. You need to decide on a minimum ending balance that your company must have each month for your business to run well.

5. If Your Cash Flow Turns Negative, You Have To Borrow Money

In a business, accounts receivable or borrowed money is not a new concept. If cash flow turns negative, or your business runs a deficit, then there’s nothing wrong with borrowing money to cover cash shortfalls for the month. Borrowing money can be done from friends, investors, family, or from banks and other financial institutions. If the business cash flow is positive in the next month, then you can repay the loan.

6. Be Consistent with the Cash Budget During the Planned Period

Continue to do a cash budget every month. Try to keep your loans to a minimum and cash inflows greater than cash outflows. Keep in mind that a cash budget is just a financial planning document, but try to be as consistent with it as possible.

Short Term Cash Budget and Long Term Cash Budget

When classifying cash budgets, people usually divide them into two categories: short-term cash budgets and long-term cash budgets. A short-term cash budget covers a period measured in weeks or months. While the long-term cash budget covers a period of years. A one-year cash budget is sometimes referred to as an intermediary cash budget.

A short term cash budget will allow you to test the short term viability of a company. They are most useful when checking the sustainability of obligations that companies face on a regular basis. Where the company’s short-term cash budget can verify that they can meet demands such as bills, salaries, rent, and also production costs. This will often include financial projections based on sales and billing accounts.

While the long-term cash budget provides a better picture of the company’s survival. Rather than focusing on individual metrics such as those in short-term cash budgets, these long-term cash budgets typically use macro-level assessments of the company such as quarterly reports. The long-term cash budget is one tool that serves tasks that include determining a company’s value as an investment by making projections of how the company will grow over a number of years.

Longer timeframes in the long-term cash budget require more projections, which can lead to increased uncertainty. However, it can also provide valuable insight into a company’s chances of long-term success.

Easy Tips for Creating a Cash Budget

After knowing the definitions, objectives, and also the types of cash budget preparation methods. Next, we’ll talk about an easy way to create a cash budget.

1. Conducting an Analysis of the Amount of Cash Entering the Company

This first step is the basis for preparing a cash budget. When starting a business, we must have an initial cash balance and estimate how much cash targets we must get each month.

2. Estimating Company Outflows

In addition to cash out, we also need to make a cash out budget plan every month. For example, purchasing equipment, paying rent, electricity expenses, and also employee salaries.

3. Make sure the incoming cash flow is greater than the outgoing cash

In order for your business to get the maximum profit, it is certain that the cash received must be greater than the expenses. If the opposite happens, it means the loss you will get. Therefore, be careful in managing cash.

4. Look for Other Sources of Funds When Flows Turn Negative

If the cash flow is negative, it indicates that your company is experiencing a cash shortage. Therefore, you are advised to take loan funds from other parties to make financing. So that later the cash flow can turn into positive again.

5. Develop a Cash Budget Consistently

Cash Budget is your guide in managing the business. By routinely doing this cash budget, it will definitely have a big impact on your business.

This is an explanation of the meaning of cash and capital budgets that you need to understand. For Matobers who want to know more deeply about economics and other accounting, they can read related books by visiting To support Matobers in adding insight, Sinaumedia always provides quality and original books so that Matobers has information #MoreWithReading.