# Cash Budget
A cash budget is the most significant device to plan for and control cash receipts and payments.
- If it shows a surplus, the firm can invest spare cash in marketable securities and earn a return.
- If it shows a shortage, the firm can arrange an overdraft or credit with banks in advance.
## A. Cash Budget for a Short Period (format)
Prepared month-by-month (Month 1 … Month 12). Closing balance of one month becomes the opening balance of the next.
Receipts
1. Opening balance
2. Collection from debtors
3. Cash sales
4. Loans from banks
5. Share capital
6. Miscellaneous receipts
7. Other items
— Total receipts
Payments
1. Payments to creditors
2. Wages
3. Overheads (a, b, c)
4. Interest
5. Dividend
6. Corporate tax
7. Capital expenditure
8. Other items
— Total payments
Closing balance = Total receipts − Total payments → shown as Surplus (+) / Shortfall (−).
## B. Cash Budget for a Long Period
Long-range cash forecasts often resemble the projected sources and application of funds statement.
Procedure — start with cash at bank and in hand at the beginning of the year, then:
Add:
- (a) Trading profit (before tax) expected to be earned
- (b) Depreciation and other development expenses written off (non-cash, added back)
- (c) Sale proceeds of assets
- (d) Proceeds of fresh issue of shares or debentures
- (e) Reduction in working capital (current assets except cash, less current liabilities)
Deduct:
- (a) Dividends to be paid
- (b) Cost of assets to be purchased
- (c) Taxes to be paid
- (d) Debentures or preference shares to be redeemed
- (e) Increase in working capital (current assets except cash, less current liabilities)
> Note the symmetry: a decrease in working capital adds to cash; an increase in working capital deducts from cash.