## Methods of Cash Flow Budgeting
A cash budget can be prepared using any of three methods:
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### Method 1: Receipts and Payments Method
Most commonly used method by business organizations.
How it works:
- Lists all expected cash receipts and payments for the period
- Draws from all sub-budgets (sales, purchases, capital expenditure)
- Ignores accruals and non-cash items (e.g., depreciation is excluded)
Formula:
```
Opening Cash Balance
+ Cash Inflows
− Cash Outflows
= Closing Cash Balance
```
---
### Method 2: Adjusted Income Method
How it works:
- Starts with net profit/revenue
- Adjusts for non-cash items:
- Add back non-cash expenses (e.g., depreciation)
- Adjust for changes in working capital (debtors, creditors, stock)
Best used when: A firm wants to relate its profit position to its cash position.
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### Method 3: Adjusted Balance Sheet Method
How it works:
- Based on forecasted balance sheets
- Assets (except cash) and short-term liabilities are expressed as percentages of expected sales
- Profit is also a % of sales; owner's equity forecasted accordingly
| Condition | Implication |
|---|---|
| Budgeted assets > Liabilities | Firm needs more finance |
| Budgeted liabilities > Assets | Positive cash surplus exists |
Best used when: Planning capital investments alongside cash management.
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### Capital Budget Link
While preparing a cash flow budget, capital budgeting is also considered:
- Add costs and expected returns of new projects to the cash budget
- Helps in planning both short-term and long-term financial periods
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### Comparison Summary
| Method | Starting Point | Non-cash Items | Best For |
|---|---|---|---|
| Receipts & Payments | Cash transactions | Excluded | Day-to-day cash planning |
| Adjusted Income | Net profit | Adjusted out | Profit-to-cash reconciliation |
| Adjusted Balance Sheet | Balance sheet ratios | Incorporated | Long-term planning with capital budgets |