Cash flow is one of the most common pressure points for a small business. In the Federal Reserve's 2024 Small Business Credit Survey, 51% of small employer firms reported uneven cash flow as a financial challenge, and 56% cited difficulty paying operating expenses. A cash budget is one of the simplest tools for staying ahead of both.
Cash budgeting is a method of budgeting that shows expected cash sales and expected cash expenses to determine if you have enough cash to fulfill your expenditures. Having a cash budget helps you understand how much money you have and where you can make adjustments to free up cash.
At Relay, we want to make it easy to understand precisely what you're earning, spending and saving so you can make the smartest decisions for your business. But with so many budgeting methods to choose from, it can be hard to find the right one. That's why we put together a series about business budgeting covering everything you need to know about cash budgeting: what it is, why it's essential and how to create one for your business.
What is a cash budget?
Cash budgeting involves calculating cash inflows and outflows to determine the cash you aim to have in the bank at the end of each fiscal period. The objective is to give you a clear picture of how much money you have and if it's enough to cover your expected expenses.
For example, you may forecast $10,000 in revenue this month, but if you offer credit or payment plans to your customers and only 40% of them pay in cash, that leaves only $4,000 available to pay your bills this month.
Cash budgeting differs from other budgets, like value proposition or envelope budgeting, because it focuses explicitly on cash flowing in and out of your bank account. Budgets are an opportunity to forecast by estimating future income and expenses, set achievable targets for growth, anticipate your company's cash position and stick to a long-term plan.
Since cash flow is a critical part of a successful business, it's essential that you prepare a cash budget effectively. Let's look at how you can do just that.
How to prepare a cash budget
Have you ever found yourself without enough cash to pay your bills, even after one of your biggest sales months? A cash budget prevents these cash flow issues by forecasting actual cash transactions, so you can prepare ahead of time.
With cash budgeting, there are five basic steps you'll need to follow:
With each step, provide realistic numbers and look ahead for any irregular or unexpected expenses. If it sounds challenging, don't fret—the longer you work on preparing cash budgets, the easier it gets. Let's break down each of the five steps.
Use the right tool or template
There's no reason to recreate the wheel every time you budget. That just wastes time and money. So if you can, save time by investing in budgeting software or using a template in Excel or Google Sheets.
A business banking platform with built-in budget management, like Relay, is a great option to free up time spent digging through financial statements. Relay offers up to 20 checking accounts with no monthly maintenance fees to help categorize your cash into multiple categories, making it easier to anticipate expected cash receipts.
If you use a spreadsheet template, double-check your formulas, whether they're simple or complex. You don't want to think you're in a great financial position, only to fall short because of a miscalculation.
Or, if you're interested in more in-depth cash flow management and visual forecasting or full-blown ERP systems, check out our favorite software here.
Decide on a budget period
Estimate your cash inflows and outflows weekly, monthly, quarterly, or annually. The right period between each budget will depend on your company and how granular you need the process to be, though many businesses budget on a short-term, quarterly basis. Whatever period you choose, review the budget regularly to make sure you're on track.
Decide on a minimum cash balance
How do you stay on track? That depends on the amount of cash you need to have on hand. Aspects like your monthly bills, seasonal sales fluctuations and irregular bills can all affect cash flow. Be sure to include an additional cash buffer here for unexpected expenses.
Calculate your cash inflows
Next, calculate your estimated cash inflows, which start with sales and your current assets. But remember, not all sales represent cash in hand, and inflows will vary depending on your rate of accounts receivable being paid.
Also consider the slow times of the year that affect your cash fluctuations. If you're in your first few years of business, this will be harder to estimate but easier to forecast over time.
Estimate the number of credit sales vs. cash sales and how fast you're usually able to collect those credit sales. Stay on top of billing and reminders for outstanding accounts receivable to keep cash flow moving through to the end of the period.
Calculate your cash outflows
Then list the bills and expenses you need to pay, such as:
Rent
Insurance
Fuel
Repairs and maintenance
Supplies
Utilities
Marketing
Payroll
Some outflows will be fixed expenses, such as rent and insurance, while others are harder to estimate because they vary, such as fuel, depreciation or raw materials. Calculate the average of these irregular expenses, anticipating any increase or variation.
For example: if you travel for business, rising fuel costs will increase the amount you spend on fuel. You'll need to account for this in your budget or look for ways to decrease it, such as more virtual, rather than in-person, meetings.
Cash budget example
Let's walk through an example to give you a better understanding.
Start with your profit and loss statement to get a general idea of your finances. If you're using accrual accounting, this is a number used for accounting purposes:
Profit and loss | Amount |
|---|---|
Revenue | $24,000 |
Rent | $5,000 |
Utilities | $2,000 |
Loan payments | $1,500 |
Payroll | $6,000 |
Marketing | $4,500 |
Total expenses | $19,000 |
Profit | $5,000 |
But here's what that translates into in your bank account if you allow sales to be put on credit:
Cash position | Amount |
|---|---|
Beginning cash balance | $3,500 |
Cash sales | $12,000 |
Rent | ($5,000) |
Utilities | ($2,000) |
Loan payments | ($1,500) |
Payroll | ($6,000) |
Marketing | ($4,500) |
Total cash outflows | ($19,000) |
Ending cash balance | ($3,500) |
Being short $3,500 is a big difference from thinking you have a $5,000 cash surplus. These discrepancies can be detrimental to your business if not caught ahead of time, especially if they happen consistently.
How to analyze your cash budget
Now that you've prepared your cash budget, let's figure out what it means for your business.
If you calculate your estimated cash flow and the result is negative, you may be in a position where you need to borrow, decrease expenses, or increase revenue. But first, figure out why you're coming up short before making adjustments.
A negative cash flow is typical for new businesses but is not sustainable long term. That's why you need a plan in place in case you need to correct your cash flow. A negative cash flow can result from timing issues, such as bills coming due before customers pay, or from high operating expenses, which you should review to see if any can be reduced or eliminated. This is a good opportunity to negotiate payment terms with your customers and your vendors.
Another solution for negative cash flow is to find ways to increase revenue, such as offering price incentives or adding a new service. If nothing else, consider financing to cover the gap—but use it wisely.
How often should you update your cash budget?
Update your cash budget at least once a month, and compare your forecast against what actually landed in and left your accounts. A cash budget is only useful if it stays close to reality, and a forecast built in January drifts fast once real sales, late invoices, and surprise bills come in.
A few habits keep it accurate:
Reconcile before you review. Match your budget to actual bank activity first, so you're adjusting against real numbers, not estimates.
Track the variance. Note where actuals differ from your forecast and by how much. Repeated misses in the same category tell you which assumptions to fix.
Reforecast the rest of the period. Roll the new information forward rather than waiting for the next cycle to start clean.
Shorten the period when cash is tight. Move from monthly to weekly during a slow season or a growth push, when timing matters most.
How to automate cash management
Relay lets you open up to 20 checking accounts per business with no monthly maintenance fees, and create "compartments" for each type of expense, such as taxes, payroll and marketing. Once you've completed your cash budget, you can manage every kind of expense with a separate account and set aside cash specifically for those expenses.
Is a cash budget right for your business?
Ultimately, there's no one-size-fits-all approach to business budgeting, but having enough cash to pay your bills is crucial to the success of your business. We hope this series about business budgeting gives you a good understanding of cash budgeting and other budgeting methods.
As your business grows, you'll need a bank that offers more than just a basic checking account. With Relay, you can better categorize and separate expenses to understand precisely what you're earning, spending and saving. If you're looking for an online banking and money management platform that helps you put your cash budget into practice, open a Relay account today.
Frequently asked questions
What is a cash budget?
A cash budget is a forecast of the cash coming into and going out of your business over a set period. It shows whether you'll have enough cash on hand to cover expenses, rather than whether you're profitable on paper.
What's the difference between a cash budget and a cash flow statement?
A cash budget looks forward: it forecasts expected inflows and outflows so you can plan. A cash flow statement looks backward: it reports the cash that actually moved during a period. You use the budget to plan and the statement to check how close you came.
How is a cash budget different from a profit and loss statement?
A profit and loss statement can show a profit while your bank account runs dry, because it counts sales you've invoiced but not yet collected. A cash budget only counts cash you actually expect to receive and pay, which is why a profitable month can still leave you short.
How often should you prepare a cash budget?
Most businesses prepare one quarterly and review it monthly. Shorten the cycle to weekly when cash is tight or during a fast-growth stretch, when the timing of inflows and outflows matters most.
