How to Estimate the Components of a Cash Budget

by Charlotte Johnson

Just as individuals who create personal budgets tend to monitor and manage their money more carefully, businesses also benefit from creating and following budgets. When a company creates a budget that tracks incoming and outgoing cash, it is known as a "cash budget." Successfully implementing this type of management plan requires being able to estimate future income and expenses. If the company can accurately predict upcoming cash flow, it will be better equipped to make and see through important financial decisions.

1. Maintain precise records of all incoming cash flow as well as expenditures. You will need these records to estimate future cash income and expenses. Label your records and group them together by month and year.

2. Analyze your sales data and other income sources over a period of time to estimate future income for a comparable accounting period. In a cash budget, you will need to add sales, collection of accounts receivable and other sources of income, such as dividends. Consider an example in which you are setting a cash budget for the months of October, November and December. If every year for the past 10 years your company had a 5 percent increase in sales during the month of December, you can make a reasonable prediction that upcoming sales will follow the same pattern.

3. Examine your past expenses to estimate future expenses. Common expenses covered in a cash budget include payroll, materials, advertising and administrative expenses. If your need for materials and the number of employees on your payroll haven't changed in the last few years, you can estimate your payroll and material expenses based on the pattern that your business has demonstrated in the recent past.

4. Adjust your estimates if you anticipate circumstances that will differ from past trends and patterns. For example, if your company has hired five new employees and you pay each a salary of $50,000, you will need to add this new expense to your estimated cash outflow.

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