Cash Budget

A normal budget focuses on income and spending. A cash budget focuses on timing: exactly when money will arrive and when it must be paid out. This matters because income and bills rarely arrive on the same day.

For example, a small business may make a sale of 20,000 in March but not receive payment until May. Its staff and suppliers, however, must be paid in March and April. A cash budget lays out month by month the opening cash balance, expected receipts, expected payments and closing balance, so any shortfall is visible in advance.

If the cash budget shows the balance falling below zero in a particular month, the business can act early. It might chase customers for faster payment, delay a purchase, arrange a short-term loan or draw on a cash reserve.

Households can use the same idea. Someone paid monthly who faces a large annual insurance bill in January can use a cash budget to set aside money during earlier months, so the bill does not cause problems when it arrives.