How to Create a Cash Budget to Improve Your Bottom Line

Short-tem Financial Planning

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There's nothing more important to your business than cash. The way cash moves in and out of your business are called "cash flow," and cash flow can be the difference between staying in business and going belly-up. A cash budget determines the patterns of how you take in and pay out money over a specific period of time, such as a month, quarter, or year. Your goal is to maintain sufficient cash for operations and liabilities without leaving too much cash idle or unproductive. While it's impossible to predict exactly how your cash will flow in any given month, the process of creating a budget and comparing it to reality will help you to manage shortfalls and plan for appropriate use of excess funds.

Short-Term Financial Planning

The cash budget is one of the primary tools used in short-term financial planning in order to plan for cash flow. It is often developed on a month-by-month basis. A good cash budget allows the owner to see short-term financial needs and opportunities for the business. One month, the firm may have extra cash and may be able to save some money in a money market fund or take advantage of a bargain in the marketplace. Another month, the firm may have a shortfall and have to withdraw some money from savings or even apply for a short-term bank loan to cover its needs.

You can see by looking at this explanation of a cash budget how owners state their expected cash inflows (sales revenues) and outflows (expenditures) on a month-by-month basis to calculate their excess cash or cash shortage at the end of each month. It is an extraordinarily helpful short-term planning tool for the small business owner.

Three Main Components

There are three components to the process of developing a cash budget:

  • Time period (the amount of time for which you are developing the budget)
  • Desired cash position (the amount of cash you want to keep on hand based on the nature of your business, the flow of accounts receivable, and the possibility of drastic change such as an immediate opportunity or unfortunate occurrence)
  • Estimated sales and expenses during the selected time period

Because sales and expenses are estimated, your cash budget will never be completely accurate, but over time you'll become more adept at forecasting expected sales and expenses for a given time of year.


Once the cash budget is prepared you'll compare it to your company's real-world performance. You'll almost certainly need to tweak the budget as changes occur based on unexpected expenses or windfalls. This will give you the real-world input to adjust the cash budget for this period, and refine your thinking for the next period.

Small business owners should pay close attention to their cash position, cash flow, and the veracity of their cash budget. Preparing a monthly budget versus actual report will provide you with actionable information to make important decisions. Without these tools, there's a very good chance that you will either find your organization cash poor or wind up with uninvested cash that could be better used to improve the bottom line.