## Methods of Cash Flow Budgeting

A cash budget forecasts cash inflows and outflows over a period. There are three main methods.

### 1. Receipts and Payments Method

Considers all expected receipts and payments for the budget period.
Includes cash inflows and outflows from all functional budgets, including capital expenditure.
Adjustments and accruals are ignored (purely cash basis).
Closing cash balance = Opening balance + anticipated cash inflows − cash payments.
Most commonly used in businesses.

### 2. Adjusted Income (Profit) Method

Starts from sales revenue and costs, then adjusts for delays in receipts and payments (changes in debtors and creditors).
Non-cash items like depreciation are removed to arrive at actual cash flow.

### 3. Adjusted Balance Sheet Method

Uses a budgeted balance sheet.
Assets (except cash & bank) and short-term liabilities are expressed as a percentage of expected sales; profit is also estimated as a percentage of sales.
Helps forecast owner's equity and reveals whether extra finance is needed or there will be a positive cash balance (the balancing figure is cash).

⚠️ Common exam mistakes

Including non-cash items such as depreciation in the cash budget — they must be excluded (especially under the adjusted income method).
Forgetting to include capital expenditure in the receipts and payments method.
Adjusting for accruals under the receipts and payments method — that method is on a pure cash basis; accrual adjustments belong to the adjusted income method.
Not treating cash/bank as the balancing figure under the adjusted balance sheet method.

Reference:

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Methods of Cash Flow / Cash Budgeting

⚠️ Common exam mistakes