## Methods of Cash Flow (Cash) Budgeting
A cash budget forecasts cash inflows and outflows for a budget period so the firm can plan for surpluses and shortages in advance. There are three methods of preparing it.
### 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 (only actual cash movements matter).
- Closing cash balance = Opening balance + Anticipated cash inflows − Anticipated cash payments.
- This is the most commonly used method in business.
### 2. Adjusted Income (Adjusted Profit & Loss) Method
- Starts from budgeted sales revenue and costs, then adjusts for delays in receipts and payments (i.e., changes in debtors and creditors).
- Non-cash items like depreciation are removed to arrive at actual cash flow.
- Essentially converts accrual profit into 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 determine whether extra finance is needed or whether there will be a positive cash balance.
### Quick comparison
| Method | Basis | Treatment of non-cash items |
|---|---|---|
| Receipts & Payments | Direct cash flows + capex | Ignored entirely |
| Adjusted Income | Profit adjusted for debtor/creditor changes | Removed (e.g. depreciation) |
| Adjusted Balance Sheet | Items as % of sales | Built into balance-sheet logic |