## Methods of Cash Flow Budgeting
A cash budget is a forecast of cash receipts and payments over a period of time. There are three main methods to prepare it:
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### 1. Receipts and Payments Method
- Most commonly used method by business organisations
- Lists all expected cash receipts and payments for the budget period
- Includes cash flows from all budgets (sales, purchase, capital expenditure)
- Ignores accruals and non-cash items like depreciation
Formula:
> Opening Cash Balance + Cash Inflows − Cash Outflows = Closing Cash Balance
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### 2. Adjusted Income Method
- Starts with net profit or revenue and adjusts it for non-cash items
- Adjustments include:
- Adding back non-cash expenses (e.g., depreciation)
- Adjusting for changes in working capital (debtors, creditors)
- Useful when a business wants to relate profit to cash position
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### 3. Adjusted Balance Sheet Method
- Based on forecasted balance sheets
- Assets (except cash) and short-term liabilities are expressed as percentages of expected sales
- Profit is also expressed as a % of sales; owner's equity is forecasted accordingly
Decision Rule:
| Condition | Implication |
|---|---|
| Budgeted Assets > Liabilities | Firm will need more finance |
| Budgeted Liabilities > Assets | Firm will have a cash surplus |
- Useful when planning capital investments alongside cash management
### Capital Budget Link
While preparing a cash flow budget, capital budgeting is also considered:
- If a new project is planned, add its costs and expected returns to the cash budget
- Helps plan both short-term and long-term periods