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Everyone knows “cash is king” but few consider that a cash budget is necessary to make this true. Having cash in the bank means nothing without a sustainable plan for how to use that money. 

If cash is king, a cash budget is its most trusted advisor. To stay financially healthy, you need to be able to accurately forecast how much cash your business will have and make strategic budgeting decisions based on those realities. 

In this article, we’ll cover what a cash budget is, how to prepare and maintain one, why it's important, and relevant considerations and challenges to keep in mind when preparing a cash budget.  

What is a cash budget?

A cash budget is a forecast of cash inflows and outflows. Accounting teams use it to estimate how much cash a business will have over a set period of time. 

For example, if a business starts from zero and is expected to earn $100,000 and spend $60,000 in February, the month of March will start with a cash budget of $40,000. 

Knowing this amount helps the business make strategic decisions on how to spend its cash. It can also prompt the business to look for funding if the cash budget will not cover forecasted expenses. 

Smaller businesses often choose to keep a monthly or weekly rolling budget. But cash budgets can also be made on a quarterly or annual basis. 

Like any budget, the best way to create an accurate cash budget is to look at past history. Because of this, it’s best to use smaller increments of time for newer businesses. 

Is a cash budget necessary?

There are many types of business budgets and it’s tempting to disregard a cash budget in favor of a broader overview of a company’s financial health. 

But cash budgets enhance your understanding of your operation by providing a reality check. Operating budgets can only go so far without knowing how much “no-strings” money your business has access to. 

There are several legitimate ways to finance your business when your cash flow won’t cover expenses, but these often come with obligations like paying interest, selling assets or giving up equity. Cash-on-hand is liquid, immediately available and doesn’t come with any strings. 

Because of these qualities, it’s important to keep tabs on your cash budget. Knowing how much cash you are likely to have in a given timeframe helps you keep a healthy ratio of cash to debt and gives you a fuller financial picture of your business. 

Knowing how much cash you have gives you the foresight to decide when to invest capital in expansion and when to play it safe or look for other sources of funding. 

Cash budget vs. operating budget, cash flow statement & capital budget

If you didn’t go to school for accounting, it’s tough to keep track of all of these terms (even with a degree, it’s still tough). In this section, we’ll discuss where cash budgets fit in. 

Operating budget 

An operating budget can be covered by a cash budget, but it often includes other types of funding such as credit or equity financing. 

Whereas cash budget deals strictly with cash, an operating budget outlines how all sources of funding will be managed over a period of time. 

Operating budgets typically cover a longer time frame than cash budgets and may be ideal rather than realistic. On the other side, cash budgets lay out financial realities and uncover when a business requires outside funding. 

Cash flow statement 

A cash flow statement looks backwards rather than forwards. Budgets are a plan for the future; statements are a summary of what happened. In an ideal world, your cash budget and cash flow statement look similar. 

Capital budget

Similar to operating budgets, capital budgets can use other funding in addition to cash. An additional difference is that capital budgets look at the viability of specific projects or investments rather than the overall operation of the business. 

How to prepare and maintain a cash budget

Here is a step-by-step guide for preparing a cash budget. Use this as a template to make sure you have checked everything off your list before preparing your budget. 

Step #1: Decide on a time frame 

Deciding a time frame for your budget will depend on your goals and the current state of your business. 

If you’re a new business or struggling with cash flow, it’s best to keep the time frame short. Quarterly is typical, but you can shorten this to weekly or monthly depending on the nature of your industry and how quickly you expect to receive money from sales. 

More established businesses that are experiencing growth may choose an annual or even longer time frame to aid long-term decision-making. There is no right or wrong answer. You can also make multiple cash budgets for both short- and long-term strategies. 

Keep in mind that the longer the time frame, the more uncertainty you will have in your budget. In general, it is easier to predict what will happen in the next month than in the next year. 

Step #2: Set a goal 

The purpose of making a budget is to create a plan that helps your business achieve a goal. With that said, it’s important to choose this goal before starting your budget-making process. 

A typical goal for a cash budget is a “cash position”. In other words, how much cash do you want to have on-hand at the end of the time period you set? Your answer will depend on factors like your industry, the competition and the overall economy. The harder it is to make sales, the more money you will want in your reserves. 

It may be helpful to think about your cash in terms of how many sales they represent. This helps you gauge how much time your business could run solely on reserves. 

For example, if you sell a product and the marginal profit is $50.00, a $50,000 cash reserve represents 1000 sales. On the other hand, if you sell a service for $10,000, the same $50,000 cash reserve represents 5 sales. 

Comparing these numbers to the average amount of sales made in a month will give you an estimate of how long your cash reserves would keep the business afloat. 

Step #3: Enter current numbers 

The next step is to understand how much cash your business has. This includes any liquid source of money, including checking and savings accounts, as well as your petty cash fund and any other cash accounts. This gives you a beginning balance to work with. 

When entering current numbers, remember to use the ending balance of the last period as the beginning balance for the next. You will only start at zero if the business is new or there is no cash left over from the last period. 

Step #4: Analyze cash flow 

After determining how much cash you currently have, you’ll want to understand your cash flow conversion. This process can be done manually, but you’ll save time and be more accurate by using a tool like Ramp’s real time reporting

Cash in includes sales and other forms of income like investments or dividends. Cash out includes recurring expenses such as payroll, materials, marketing, equipment and subscriptions, as well as variable and unforeseen expenses. 

Your cash flow is the money you make minus your expenses. To fully understand your cash flow, you can analyze where cash out is going and if there is any room to cut spending. It is also helpful to understand where money is coming in and how sustainable this revenue is. 

Again, this can be done manually. But if speed and accuracy matter to your business, having AI insight into real savings opportunities streamlines your cash budget creation. Instead of searching through excel sheets to see where you can cut down, Ramp’s AI will notify you about duplicate spending, partner rewards, and price benchmarking. 

Step #5: Forecasting

Finally, combine the information about your current numbers and cash flow with historic cash flow data with your knowledge of market conditions to forecast the amount of cash you will have during the time frame you set. 

Let’s say your timeframe is Q1 and you see that last year your business had $100,000 cash in and $80,000 cash out. This left $20,000 in cash at the end of Q1 last year. That is a good benchmark to start your forecast with. But you must also consider market conditions and changes to your business. 

For example, if business has been gradually increasing for the last few quarters, you might estimate a higher cash in. On the other side, if the cost of raw materials has gone up, it’s wise to estimate a larger cash out. Making these adjustments will lead to more accurate forecasting.

When forecasting cash in, make sure to adjust for realistic pay outs. If you expect to make $10,000 in sales but only 80% of your accounts are paid on time, your actual cash in will be $8,000.

How to manage cash flow and automate your cash budget

Ramp provides all the information you need to create a cash budget in one easy-to-access and organized place. By automating cash flow management, you’ll save time and have more accurate information to create cash budgets. 

Gather financial data automatically 

Instead of scrolling through several isolated spreadsheets and bank summaries, connect your accounts to Ramp and organize your finances all in one place. You’ll be able to visualize your cash flow and categorize cash in and cash out to find the insights you need. Easily export this data to other visualization software to fit your business needs. 

Streamline spending

Get all the tools you need to create a healthy spend culture on your team. Save money on your most expensive contracts by having our experts negotiate for you. Businesses save an average of ~27% on large contracts by letting Ramp do the legwork. 

You’ll also save on subscriptions and smaller contracts. Stay on top of duplicate spending, increasing prices and out-of-policy expenses with our AI-powered price alerts. 

Create accurate estimations 

Keeping your business financially stable depends on accurate estimations. Create accurate cash budgets (and other budgets) by visualizing the financial health of your business all in one place. 

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FAQs

What is the difference between cash budget and profit and loss statement?

A cash budget is made before a certain time period and aims to estimate cash in and cash out. A profit and loss statement is created after that same time period and is a real account of revenue and expenses. 

How do you calculate your cash budget?

Calculate a cash budget by combining current and historic financial data with knowledge of market conditions. The more accurate your financial projections, the more you will be able to do with a cash budget. 

Can Ramp help prepare a cash budget?

Yes. Ramp makes it easy to visualize your cash in and cash out for any given time period. This helps you see trends and create more accurate estimates of your cash flow. 

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