A cash budget places money in the month it is expected to enter or leave the business. Sales, purchases and expenses provide important information, but their accounting period may differ from their payment date. The most useful first step is therefore a timing schedule. Once receipts and payments are placed correctly, the monthly bank movement becomes easier to follow.
Read the collection terms, supplier terms, opening balances and one-off transactions before calculating totals. Keep a separate working for each timing pattern. This guide uses a simplified original three-month example with explicitly stated assumptions. It does not include tax, interest or other items unless named. Examination questions may require additional schedules or different payment conventions, so use their actual instructions.
Define the budget period and opening cash
Write the months in order and establish the opening cash or bank balance for the first month. A positive balance and an overdraft need different signs in a movement check. Keep the first opening balance separate from the month's receipts; it is money already present, not a new receipt from trading.
At the end of each month, closing cash becomes the next month's opening cash under the simplified model. Do not restart each column using the original first-month balance. This carry-forward relationship is a useful arithmetic check and makes it possible to locate which month's error first changed the later balances.
Translate collection terms into a schedule
Suppose 20% of each month's sales are collected in that month and 80% in the following month. January sales of 10,000 therefore generate 2,000 cash in January and 8,000 in February. The total remains 10,000 under these assumptions, but its timing is split across two months.
Do not place the whole 10,000 in January and then add the delayed 8,000 again in February. Label the sales month and receipt month separately. If the question includes discounts, irrecoverable balances or a longer collection pattern, calculate the relevant proportions and timing carefully. The collection schedule should explain where every included receipt comes from.
Include receipts from before the budget period
Opening receivables can create receipts during the first budget month. In this example, December sales were 9,000 with the same 20% immediate and 80% next-month collection pattern. January therefore includes 7,200 collected from December. Without that prior-period information, the first month's receipts would be understated.
Read whether opening receivables are supplied directly instead. Do not include both the stated balance and a reconstructed December amount unless the facts show that they represent different items. The receivables control-account guide provides a related way to check the connection between credit sales, receipts and outstanding balances.
Complete the receipts example
Let January, February and March sales be 10,000, 12,000 and 8,000. January receipts are 2,000 from January plus 7,200 from December, totalling 9,200. February receipts are 2,400 from February plus 8,000 from January, totalling 10,400. March receipts are 1,600 from March plus 9,600 from February, totalling 11,200.
At the end of March, 80% of March sales, or 6,400, remains to be collected in April under the pattern. It is not a March receipt. Total receipts over the three months are 30,800, compared with sales of 30,000. The difference is consistent with opening receivables of 7,200 falling to closing receivables of 6,400.
Build a separate supplier-payment schedule
Suppose all purchases are paid one month after purchase. December purchases were 4,500; January, February and March purchases are 5,000, 6,000 and 4,000. Supplier payments in January are 4,500, in February 5,000 and in March 6,000. March purchases are paid in April, outside this budget period.
Do not use the sales collection percentages for supplier payments unless the question explicitly gives the same terms. Receivables and payables have distinct timing patterns. Keep their schedules separate even when both involve a one-month delay. The incomplete-records guide explains why balances and movements must be labelled consistently before using them in a reconstruction or forecast.
Place ordinary payments in the correct month
Assume wages of 1,500 and rent of 1,000 are paid each month. They add 2,500 to the month's cash payments. If the question describes an accrued expense or payment covering several periods, follow the cash date for the cash budget. The expense recognised in profit may be different.
Read whether a quoted amount is monthly, quarterly or annual. A quarterly payment should not automatically appear in every month. Equally, a monthly rate does not necessarily mean immediate payment if the question provides a delay. Translate the wording into a short schedule before combining the figures in the final budget.
Include one-off capital payments
Suppose equipment costing 4,000 is paid for in February. Include the 4,000 cash outflow in February under the stated assumption. Do not omit it because it is not an ordinary expense, and do not replace it with depreciation in the cash budget. Purchase, payment and period expense are different ideas.
If the equipment is bought on instalments, use the actual payment schedule rather than the total cost in one month. If a deposit was paid before the budget period, avoid counting it again. The cash flow and profit guide explains why cash budgets include movements that do not appear as identical expenses in profit calculations.
Calculate January's closing cash
Opening cash is 1,000. January receipts are 9,200. Payments comprise suppliers 4,500, wages 1,500 and rent 1,000, totalling 7,000. Net cash movement is 2,200, so closing cash is 3,200. Show the receipt total, payment total and net movement separately.
Check the relationship directly: opening cash plus receipts minus payments equals closing cash. A net movement of 2,200 is not the same as the closing balance of 3,200. Confusing those two quantities can affect every later month. Keep their labels distinct in the final layout and carry only the closing balance into the next month's opening line.
Carry the balance through February and March
February opens with 3,200. Receipts are 10,400, while payments are suppliers 5,000, wages 1,500, rent 1,000 and equipment 4,000, totalling 11,500. The net movement is negative 1,100, leaving closing cash of 2,100. The equipment payment explains part of the lower balance without being treated as an ordinary monthly expense.
March opens with 2,100. Receipts are 11,200 and payments total 8,500: suppliers 6,000, wages 1,500 and rent 1,000. Net movement is 2,700 and closing cash is 4,800. Under these assumptions, the three-month net increase is 3,800, matching opening cash of 1,000 rising to 4,800.
Keep non-cash items out of cash totals
Depreciation does not create a current cash payment merely because it appears as an expense. An outstanding accrual is not a payment until cash is expected to settle it. However, settling an opening liability can require cash during the budget period even though the related expense belongs earlier. Read the timing rather than applying a rule based only on the account label.
The accruals and prepayments guide provides a foundation for that distinction. If the question also asks for a profit budget, prepare the relevant recognition adjustments separately. Do not use one set of totals for both cash and profit simply because the underlying business transactions overlap.
Interpret shortages and temporary improvements
If a forecast balance becomes negative under the chosen sign convention, identify the month and the movements causing it. Consider the timing of collections, supplier payments, asset purchases and financing. A proposed response should fit the actual cause. Delaying an investment addresses a different issue from improving collection of overdue customer balances.
Also recognise trade-offs. Borrowing can support cash but adds obligations and possible costs. Pressing suppliers for more time may affect relationships or terms. Use the context supplied rather than recommending the same action for every negative balance. The budget is a forecast based on assumptions, so explain what would change if those assumptions fail.
Check schedules before checking totals again
When a result looks wrong, inspect the timing schedules first. Re-adding the final column will not repair a receipt placed in the wrong month. Check prior-period balances, delayed proportions and payments outside the final month. Then verify that each closing balance flows into the next opening balance.
Students seeking guidance can explore the A2 Accounts course, course catalogue and admissions FAQ. Bring the original terms and schedules with the final budget. This helps a teacher identify whether the difficulty concerns interpretation, timing or arithmetic rather than examining only the closing bank total.
Frequently asked questions
Are sales the same as cash receipts?
Not when some sales are collected later or earlier balances are received during the period. Use the stated collection terms and opening receivables. Keep the sales month separate from the receipt month in a clear schedule.
Should depreciation appear as a cash payment?
Depreciation does not itself create a current cash outflow. Include actual asset payments when due and follow the task's treatment. Profit expenses and cash movements need separate timing and classification checks.
Why do I need information from the previous month?
Delayed receipts and payments can cross into the first budget month. Opening receivables and payables or prior-period transaction figures may therefore be essential. Avoid counting the same opening item twice when both descriptions are supplied.
What is the difference between net cash flow and closing cash?
Net cash flow is the month's receipts less payments. Closing cash also includes the opening balance. Under the simplified model, that closing amount becomes the next month's opening amount.
What should I check if later months all look wrong?
Find the first month where the schedule or closing balance becomes incorrect. Inspect delayed amounts, prior-period items and the carry-forward relationship. One early timing error can affect several later balances without representing several unrelated arithmetic mistakes.
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