Cash budget explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A trading firm can show a profit and still be unable to pay salaries on the first of the month. A cash budget lays out the cash expected to come in and go out month by month, so that a shortfall is seen weeks ahead, when it can still be handled calmly. Owners of seasonal businesses and the accountants who run their payments should build one every quarter.
A cash budget forecasts monthly receipts and payments. Closing cash = opening cash + receipts - payments. Compare the closing figure with the minimum balance the firm wants to hold: a gap below it must be financed in advance, and a surplus above it can be put to short-term use. Build it from the sales forecast, the collection pattern and the payment terms, and revise it every month.
Why cash is held and what treasury means for a small firm
Firms hold cash for day-to-day payments (the transaction motive), to meet surprises (the precautionary motive) and to take up bargains or opportunities (the speculative motive). Too little means missed payments and a strained relationship with suppliers and the bank; too much earns nothing. The treasury function of a small firm is not a department. It is one person who watches the bank balance, the collections and the due dates, keeps the cash budget and decides where surplus cash goes. Cash flow in the past is shown by the cash flow statement, while the budget looks ahead.
Data needed
Sales by month, the share collected in cash and the share collected later, purchases and when they are paid, salaries, rent, interest, tax and loan instalments, planned capital spending, the opening cash and the minimum balance wanted. Non-cash items such as depreciation never appear; credit sales appear only when collected. A firm that wants the cash position weekly or tied to its books can ask for cash flow management support.
The method
- Forecast sales by month and convert them into receipts using the collection pattern.
- Schedule purchases and convert them into payments using the supplier terms.
- Add salaries, rent, interest, tax, loan instalments and capital spending in the month paid.
- Compute net cash for each month, then closing cash.
- Compare closing cash with the minimum balance; arrange borrowing for shortfalls and plan the use of surpluses.
- Speed collections (follow up, early-payment discounts, prompt billing) and control payments (use the full credit period, schedule payments, avoid duplicate payments).
Worked example: Shree Ganesh Distributors
Shree Ganesh Distributors, an invented distributor with festival-season sales, plans for six months from October. Figures in ₹ lakh. Sales: August 40, September 50, October 80, November 90, December 60, January 40, February 40, March 50. Collection pattern: 40 per cent in the month of sale, 60 per cent in the next month. Purchases for the season are paid in the month made (no supplier credit): October 75, November 70, December 35, January 25, February 30, March 40. Other cash payments (salaries, rent, interest) are 10 a month; a vehicle costing 12 is paid in December. Opening cash on 1 October: 6. Minimum balance wanted: 5. Interest on borrowing is ignored to keep the example small.
| ₹ lakh | Oct | Nov | Dec | Jan | Feb | Mar |
|---|---|---|---|---|---|---|
| Receipts: 40% of this month + 60% of last | 32 + 30 = 62 | 36 + 48 = 84 | 24 + 54 = 78 | 16 + 36 = 52 | 16 + 24 = 40 | 20 + 24 = 44 |
| Purchases paid | 75 | 70 | 35 | 25 | 30 | 40 |
| Other payments | 10 | 10 | 10 | 10 | 10 | 10 |
| Vehicle | 0 | 0 | 12 | 0 | 0 | 0 |
| Total payments | 85 | 80 | 57 | 35 | 40 | 50 |
| Net cash | -23 | +4 | +21 | +17 | 0 | -6 |
| Opening cash | 6 | 5 | 9 | 8 | 25 | 25 |
| Closing before financing | -17 | 9 | 30 | 25 | 25 | 19 |
| Borrow / (repay) | +22 | 0 | (22) | 0 | 0 | 0 |
| Closing cash | 5 | 9 | 8 | 25 | 25 | 19 |
| Surplus over minimum 5 | 0 | 4 | 3 | 20 | 20 | 14 |
Reading it. October is the problem month: festival stock is bought and paid before the money comes in, leaving cash at -17 before any action. The owner arranges a short-term limit of at least ₹22 lakh from October, to bring cash up to the minimum of 5. In December the borrowing is repaid out of the strong collections. From January the firm has surplus cash of 20 over the minimum, which can sit in a short-term deposit for the weeks until it is needed, with the cash budget revised each month. If suppliers agreed to a 30-day credit period, October's purchases would be paid in November, when collections are stronger, and the October gap would disappear; that is the cheapest source of funds if the supplier agrees. This links to the credit side in working capital cycle.
How much cash to hold: two models
Baumol model. It treats cash like stock. If the firm needs T rupees a year in cash payments, each conversion of securities into cash costs b, and the yearly return on holding securities is i, the transfer size that minimises total cost is C = square root of (2 x T x b / i). For an assumed T of ₹30 lakh, b of ₹500 and i of 8 per cent: C = square root of (2 x 30,00,000 x 500 / 0.08) = square root of 3,75,00,00,000 which is about ₹1.94 lakh. The model assumes steady, predictable spending, which suits few firms exactly.
Miller-Orr model. For irregular flows, it sets a lower limit (the minimum balance), an upper limit and a return point between them. When cash touches the upper limit, the firm buys securities down to the return point; at the lower limit it sells securities to return. The spread between limits rises with the variability of daily cash flows and the cost of transactions, and falls with the interest rate. The limits are set from the firm's own history.
Parking a temporary surplus
Choose short-term uses by safety first, then ready access, then return. State the amount and the date the money will be needed in the budget. No rate is quoted here because rates change; check current offers from your bank.
Common mistakes
- Putting credit sales in the month of sale instead of the month of collection.
- Including depreciation or other non-cash items.
- Forgetting tax, loan instalments or capital spending.
- Building the budget once a year and never updating it.
- Holding a minimum balance by habit and not by analysis.
- Planning receipts at the contract date when customers pay late; compare with the master budget for consistency.
Need help with cash planning?
If your business runs short at the same time every year, our cash flow management service builds a rolling cash budget from your sales, collections and payments and flags the weeks that need action. You then see the shortfall early and can arrange funds on better terms.
Key takeaways
- A cash budget forecasts receipts and payments month by month.
- Closing cash = opening cash + receipts - payments; compare with the minimum.
- Plan for shortfalls in advance and use surpluses deliberately.
- Baumol and Miller-Orr models help fix the cash level when flows are steady or irregular.
- Update the budget every month.
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Disclaimer: The methods described are standard cost accounting and financial management techniques. The worked example uses an invented business and invented figures, including any tax, interest or exchange rate, which are assumptions for illustration and not current rates. Where the article refers to a legal requirement, the linked guide and the official text should be checked. This article is general information, not legal advice; check the official text before acting.