How to prepare the Cash Budget

Accounting for Internal Control

What you need

• The opening cash balance (balance brought down) at the start of the first period.
• An estimate of all cash receipts for each month, for example cash sales and collections from debtors.
• An estimate of all cash payments for each month, for example payments to creditors, wages, rent and asset purchases.
• A columnar sheet or template with a separate column for each month.

Step by step

1. 1

   Set the period and the format

   Write the full heading: 'Cash Budget for the months of January to March 2024' for Perniagaan Setia. Set up one column for each month (January, February, March) and one column for descriptions. Remember that a Cash Budget records cash items only; it is not an Income Statement, so non-cash items such as depreciation and bad debts are excluded.

2. 2

   Enter the opening cash balance

   Place the cash balance at the start of the month as 'Balance b/d' on the first line. For Perniagaan Setia the opening balance for January is RM3,000. This balance is the starting point for the first month, and each month's closing balance becomes the next month's opening balance.

3. 3

   List and total the cash receipts

   Under 'Add: Receipts', list all cash expected to be received. For January: Cash sales RM8,000 and Collections from debtors RM5,000, total receipts RM13,000. Add the opening balance to total receipts to get Total cash available: RM3,000 + RM13,000 = RM16,000.

4. 4

   List and total the cash payments

   Under 'Less: Payments', list all cash expected to be paid. For January: Payment to creditors RM6,000, Wages RM2,000 and Rent RM1,000, total payments RM9,000. Make sure only actual cash payments are included, in the month they are paid.

5. 5

   Calculate the month's closing balance (balance carried forward)

   Subtract total payments from total cash available to get the closing balance. January: RM16,000 - RM9,000 = RM7,000. This RM7,000 is recorded as 'Balance c/d' (balance carried forward) for January.

6. 6

   Carry the balance to the next month

   Carry each month's closing balance forward as the next month's opening balance. January's balance c/d of RM7,000 becomes February's balance b/d. February: receipts Cash sales RM9,000 + debtors RM6,000 = RM15,000; total cash RM7,000 + RM15,000 = RM22,000. Payments: creditors RM7,000, wages RM2,000, rent RM1,000, furniture purchase RM8,000, total RM18,000. February balance c/d = RM22,000 - RM18,000 = RM4,000. For March, opening balance RM4,000; receipts RM7,000 + RM4,000 = RM11,000, total cash RM15,000; payments creditors RM6,000 + wages RM2,000 + rent RM1,000 = RM9,000; March balance c/d = RM6,000.

7. 7

   Review and interpret the result

   Check that every column adds up and the running balances are correct (RM7,000, RM4,000, RM6,000). Interpret the result: the balance stays positive throughout the period, so Perniagaan Setia does not need an overdraft. If a month showed a negative balance, the owner could plan early to delay a purchase or arrange a loan.

Second example

Kedai Harmoni prepares a Cash Budget for June and July 2024. The opening balance for June is RM1,500. June receipts: Cash sales RM4,000 and collections from debtors RM2,000, so total cash available is RM1,500 + RM6,000 = RM7,500. June payments: Payment to creditors RM3,000, wages RM2,500, rent RM1,200 and a loan instalment RM2,000, total payments RM8,700. June balance c/d = RM7,500 - RM8,700 = -RM1,200. This negative balance shows that Kedai Harmoni is short of cash in June.

The negative balance of RM1,200 is carried forward as July's opening balance. July receipts: Cash sales RM6,000 and debtors RM2,500, so total cash available = -RM1,200 + RM8,500 = RM7,300. July payments: creditors RM3,000, wages RM2,500 and rent RM1,200, total RM6,700. July balance c/d = RM7,300 - RM6,700 = RM600. This example shows how a negative balance is still carried into the next month, and how the owner can use this early warning to arrange an overdraft in June before the cash shortage happens.

Common mistakes

Related chapter: Accounting for Internal Control →

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