BasicAt its most basic, a cash budget lists an opening cash balance, cash receipts such as customer payments, cash payments such as rent and salary and financing activities such as use of a line of credit. This gives you an estimate of how much cash you will have at a point in time such as the end of a financial quarter.
Liquidity ProblemOne of the primary purposes of a cash budget is to identify liquidity risks whereby an organization may run out of cash. This can occur even if your revenue far exceeds your expenses due to the timing of payments. Running out of cash is a serious problem as you may be unable to pay things such as salary, rent, taxes and bills on time. This can damage your reputation and cause your creditors, partners and employees to rush for the exits.
Liquidity FixWhen liquidity risks are identified they can be addressed with financing activities, cut cutting or changing the timing of costs by delaying a purchase or project. In the example above, the firm fixes the liquidity problem with financing in the first quarter that is then partially paid back in the forth quarter.
|Overview: Cash Budget|
An estimate of cash flows for a period that is used to manage cash and liquidity risk.