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The cash budget

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

The cash budget forecasts cash receipts and payments month by month. It warns of shortages early, so finance can be arranged, and of surpluses that could be invested.

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Rules

Record cash when it is received or paid, not when the sale or purchase is made: use the credit terms.
Include capital receipts and payments (share issues, loans, buying non-current assets, dividends, tax).
Exclude non-cash items: depreciation, irrecoverable debts written off, provisions, profits or losses on disposal.
Deduct cash discounts from receipts (allowed) or payments (received).

Layout: receipts, total receipts; payments, total payments; net cash flow; opening balance; closing balance (which becomes next month's opening balance).

Worked cash budget

Overheads of £6,500 a month include £1,500 depreciation, so only £5,000 is paid. A machine costing £25,000 is bought in February. The opening balance is an overdraft of £4,000.

£	Jan	Feb	Mar
Cash sales	12,000	14,000	15,000
Receipts from trade receivables	26,000	30,000	33,000
Total receipts	38,000	44,000	48,000
Payments to suppliers	21,000	23,000	26,000
Wages	9,000	9,000	9,500
Overheads (excluding depreciation)	5,000	5,000	5,000
Machine	0	25,000	0
Total payments	35,000	62,000	40,500
Net cash flow	3,000	(18,000)	7,500
Opening balance	(4,000)	(1,000)	(19,000)
Closing balance	(1,000)	(19,000)	(11,500)

Cash budget

Using the cash budget

A forecast overdraft (as in February above) can be covered by arranging an overdraft facility in advance, delaying the machine purchase, leasing it, chasing customers or negotiating longer credit.
A forecast surplus could be invested short term or used to repay borrowing.
Unlike the statement of cash flows, which records the past, the cash budget looks forward.

Worked example

Sales are £40,000 in March and £50,000 in April. 30% are for cash, receiving a 5% cash discount; the rest are on one month's credit. Calculate cash received in April.

Cash sales in April = 30% x 50,000 = £15,000, less 5% discount = £14,250
Credit sales from March = 70% x 40,000 = £28,000
Total = 14,250 + 28,000

Answer: £42,250

Key idea: Cash budget: receipts and payments when the cash moves; exclude depreciation and other non-cash items; closing balance = opening balance + receipts - payments, carried to the next month.

Check yourself

Opening cash balance £6,200; receipts £48,500; payments £52,900. Calculate the closing balance. Give an overdraft as a negative number.
Show answer
£1800. 6,200 + 48,500 - 52,900 = £1,800, still in credit.
Monthly overheads in the budgeted statement of profit or loss are £9,800, including depreciation of £2,300. What is the monthly overhead payment in the cash budget?
Show answer
£7500. 9,800 - 2,300 = £7,500: depreciation is not a cash payment.
Credit sales of £24,000 in May: half the customers pay in June and take a 2% discount; the other half pay in July. How much is received in June?
Show answer
£11760. 12,000 x 0.98 = £11,760.
Purchases are £18,000 in May and £21,000 in June. Suppliers are paid two months after purchase. What is paid to suppliers in July?
Show answer
£18000. July payment is for May purchases: £18,000.
Which item should NOT appear in a cash budget?
- Purchase of a new machine
- Receipts from a share issue
- Depreciation of machinery
- Payment of a dividend
Show answer
Depreciation of machinery. Depreciation is a non-cash expense.
A cash budget shows an overdraft of £18,000 in three months' time. Which action is most sensible now?
- Arrange an overdraft facility with the bank in advance
- Pay suppliers earlier to gain goodwill
- Increase the dividend
- Ignore it until it happens
Show answer
Arrange an overdraft facility with the bank in advance. Advance warning allows finance to be arranged on better terms, or payments to be rescheduled.
An irrecoverable debt of £600 is written off. How does this affect the cash budget?
- A payment of £600
- A receipt of £600
- No entry: no cash moves, though expected receipts are lower
- It is added to opening cash
Show answer
No entry: no cash moves, though expected receipts are lower. Writing off a debt is a non-cash entry; it simply means that cash will not be received.

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Last updated 8 November 2026. Spotted a mistake? Tell us.