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Cash Budget

Imagine you're running Rajesh & Co. Pvt. Ltd. Your P&L shows a profit of ₹5 lakhs this month — yet you can't pay your suppliers. How? Because profit is an accounting concept; cash is reality. The Cash Budget is the tool that keeps you from being profitable on paper but broke in the bank.

A Cash Budget is a period-wise statement that forecasts all cash inflows (receipts) and cash outflows (payments) over a future period — weekly, monthly, or quarterly. Its sole purpose is liquidity management: know in advance when you'll be short on cash so you can arrange a loan, and when you'll have a surplus so you can plan an investment. This is asked frequently as an 8–10 mark question in CA Inter, usually requiring you to prepare a 3-month cash budget from given data.

The structure is beautifully simple — Opening Cash Balance + Receipts − Payments = Closing Cash Balance. Receipts include: cash sales, collections from debtors (applying the given credit terms), proceeds from loans, sale of assets, and fresh capital introduced. Payments include: cash purchases, payments to creditors (with lag), wages & salaries, manufacturing and selling overheads, capital expenditure, loan repayments, tax payments, and dividends. The single most important rule: depreciation is never included — it is a non-cash charge. Similarly, any accrual or provision that hasn't actually moved cash yet stays out.

The tricky part examiners love is the debtors collection pattern. If the question says 'credit sales are collected — 60% in the month of sale, 30% next month, 10% the month after' — you must stagger those collections correctly across months. Same logic applies to creditors: if purchases are paid with a one-month lag, this month's purchase flows out next month. Always build a small working-note table for receipts from debtors and payments to creditors before filling the main budget — it prevents most errors.

📊 Worked example

Example: Prepare a Cash Budget for Sharma Enterprises for April, May & June 2025

Given data:

  • Opening cash balance (April 1): ₹40,000
  • Budgeted Sales: March ₹2,00,000 | April ₹2,50,000 | May ₹3,00,000 | June ₹2,80,000
  • All sales on credit. Collection pattern: 50% in month of sale, 40% next month, 10% two months later.
  • Budgeted Purchases (cash, paid in same month): April ₹80,000 | May ₹1,00,000 | June ₹90,000
  • Monthly wages: ₹40,000 (paid in same month)
  • Monthly overheads (includes ₹5,000 depreciation): ₹25,000 per month
  • Capital expenditure in May: ₹60,000

---

Step 1 — Working Note: Collections from Debtors (₹)

| Month of Sale | Amount | In April | In May | In June |

|---|---|---|---|---|

| March (prior) | 2,00,000 | 40% = 80,000 | 10% = 20,000 | — |

| April | 2,50,000 | 50% = 1,25,000 | 40% = 1,00,000 | 10% = 25,000 |

| May | 3,00,000 | — | 50% = 1,50,000 | 40% = 1,20,000 |

| June | 2,80,000 | — | — | 50% = 1,40,000 |

| Total Receipts | | ₹2,05,000 | ₹2,70,000 | ₹2,85,000 |

Step 2 — Cash Budget

| Particulars | April (₹) | May (₹) | June (₹) |

|---|---|---|---|

| Opening Balance | 40,000 | 1,00,000 | 1,65,000 |

| Receipts: | | | |

| Collections from debtors | 2,05,000 | 2,70,000 | 2,85,000 |

| Total Available (A) | 2,45,000 | 3,70,000 | 4,50,000 |

| Payments: | | | |

| Purchases | 80,000 | 1,00,000 | 90,000 |

| Wages | 40,000 | 40,000 | 40,000 |

| Overheads (₹25,000 − ₹5,000 dep.) | 20,000 | 20,000 | 20,000 |

| Capital expenditure | — | 60,000 | — |

| Total Payments (B) | 1,40,000 | 2,20,000 | 1,50,000 |

| Closing Balance (A − B) | ₹1,05,000 | ₹1,50,000 | ₹3,00,000 |

Answer: Closing cash balances are ₹1,05,000 (April), ₹1,50,000 (May), and ₹3,00,000 (June). The firm is comfortably liquid throughout.

⚠️ Common exam mistakes

  • Don't include depreciation as a cash payment. Overheads in the question often include depreciation — always subtract it out before putting overhead payments in the budget. Only actual cash going out counts.
  • Don't forget to stagger credit sales collections. Students often book the full month's credit sales as a receipt in the same month. Apply the collection pattern carefully; some portion from 2 months ago may still be flowing in.
  • Don't ignore the opening balance each month. Each month's closing balance becomes the next month's opening balance. Forgetting to carry this forward is a common calculation error that kills 2–3 marks.
  • Don't include non-cash capital transactions incorrectly. Bonus shares issued or writing off goodwill do not appear in a cash budget — no cash moved. Only actual loan receipts, asset sale proceeds, or capital introduced in cash are included.
  • Don't confuse the Cash Budget with a Cash Flow Statement. The Cash Flow Statement (AS 3) is a historical document; the Cash Budget is a forward-looking planning tool. They use similar logic but serve different purposes — don't mix up the formats in the exam.
📖 Reference: Cash Budget — Institute of Chartered Accountants of India
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