Preparing a Cash Budget Using a Spreadsheet

What is a cash budget and how do you prepare one?

Alex: Welcome to the Leadership and Management podcast. I'm Alex, here with Sam. Last episode we looked at budgeting in the broad sense, the purpose, the types, the process. Today we're focusing on one specific type that Sam would argue is the most important of all.

Sam: The cash budget. And I stand by that. Profit gets all the attention, but it's cash that keeps the lights on. A business can be profitable and still fail. That's not a paradox; it's a practical reality that catches out managers who focus only on the income statement.

Why is profit not the same as cash flow?

Alex: Why is profit and cash not the same thing? That's the question that confuses a lot of people.

Sam: Because accounting doesn't track cash movement directly. Under the accruals concept, revenue is recognised when it's earned, not when cash is received. So if a building firm completes a contract in March and invoices for £200,000 but the client pays in June, that revenue is in the March accounts but the cash doesn't arrive until June. Meanwhile the firm is still paying wages, materials, and overheads every week. You can see how a profitable business runs into a cash crisis. There's also depreciation: it's a cost on the income statement but no cash leaves the business. And capital expenditure works the opposite way: spending £50,000 on a van is a large cash outflow that doesn't fully hit the income statement in the same year.

Alex: So the cash budget exists to map out when cash actually arrives and when it actually leaves, month by month.

How do you structure a monthly cash flow forecast?

Sam: Exactly. The structure is straightforward. You start with the opening cash balance. Then you add all cash receipts for the month: this is where credit terms matter. If you offer 30-day credit, January's sales arrive as February's cash. If 20% pay immediately and 80% pay the following month, you split accordingly. Then you deduct all cash payments: supplier payments adjusted for their credit terms, wages paid in the month they're due, overheads, and any capital expenditure. Net cash flow is receipts minus payments. Add that to the opening balance and you get the closing balance.

Alex: And the corrective actions you can take when the budget reveals a problem, what levers does a manager actually have?

Sam: Accelerating cash inflows: chasing late payers, offering early payment discounts, converting credit customers to upfront payment. Delaying cash outflows: negotiating longer terms with suppliers, deferring capital spending, reducing stock-holding. Or arranging external finance in advance, whether that's an overdraft facility or a short-term loan. The key is that you arrange this before the crisis, not during it. A bank is much more willing to discuss an overdraft when you have a cash budget showing a temporary shortfall than when you're already overdrawn and desperate.

What actions can a manager take when a cash budget shows a shortfall?

Alex: There's a real business discipline lesson there. Forecasting gives you options; crisis management gives you very few.

Sam: That's it exactly. The cash budget is a planning document that buys you time and options.

Why is cash flow forecasting important for business survival?

Alex: A question to reflect on: in your experience, have you ever seen a situation where a business or team looked financially healthy on paper but was actually under severe cash pressure? What were the warning signs, and what could have been done earlier to catch the problem?