Cash Budgets and Payment Timing
A cash budget forecasts when money will be received and paid, while a historical cash-flow statement explains cash movements that have already occurred. An income statement reports recognised income and expenses. Each serves a different purpose, so keep both the timing and the measure in mind when reading it.
The worked example connects collection and payment schedules to monthly cash balances and funding needs. This original Harbour planning scenario is separate from the financial-records case, so use only the opening balances below.
The idea behind the schedule
A sales forecast describes when sales occur; a collection schedule translates those sales into receipt dates. Credit terms create a delay between the two. The same reasoning applies to purchases and supplier payments. Keep purchases separate from cost of sales: payment terms attach to what was bought, while cost of sales reflects inventory sold.
Once receipts and payments are placed in the correct months, carry the remaining cash into the next month. This is why a positive flow in one month may be insufficient to repair an earlier shortage. Financing is a further step: it changes cash and borrowing, while leaving the original customer and supplier schedules visible.
1. Forecast and assumptions
All amounts are in pounds. Forty percent of each month's sales is collected immediately and 60% in the following month. Half of purchases is paid in the purchase month and half in the following month. Assume no older receivables/payables, defaults, returns or other receipts/payments.
| Forecast | December | January | February | March |
|---|---|---|---|---|
| Sales | 20,000 | 30,000 | 36,000 | 40,000 |
| Purchases | 12,000 | 18,000 | 22,000 | 24,000 |
| Other operating cash payments | — | 8,000 | 9,000 | 10,000 |
| Equipment paid for | — | 0 | 18,000 | 0 |
Opening January cash is £5,000. Other operating payments cover wages, rent and other operating cash costs, excluding the supplier payments and equipment shown separately. They also exclude non-cash depreciation. Ignore tax, interest and financing fees for this exercise. These exclusions are modelling assumptions, not claims about real borrowing terms.
In each schedule, trace the cash movement back to the month's sales or purchases that generated it. See OpenStax's financial-budget discussion for the relationship between collection, payment and financing schedules.
2. Receipts and payments
Schedule answers
| Cash item | January £ | February £ | March £ |
|---|---|---|---|
| Current-month cash sales | 12,000 | 14,400 | 16,000 |
| Prior-month credit collections | 12,000 | 18,000 | 21,600 |
| Total receipts | 24,000 | 32,400 | 37,600 |
| Current-month purchases paid | 9,000 | 11,000 | 12,000 |
| Prior-month purchases paid | 6,000 | 9,000 | 11,000 |
| Supplier payments | 15,000 | 20,000 | 23,000 |
| Other operating payments | 8,000 | 9,000 | 10,000 |
| Equipment | 0 | 18,000 | 0 |
| Total payments | 23,000 | 47,000 | 33,000 |
January's schedule includes the £12,000 receivable and £6,000 payable arising in December. At the end of March, £24,000 of March sales is still uncollected and £12,000 of March purchases is still unpaid. Those outstanding amounts are not March cash movements, even though the sales and purchases occurred that month.
3. The unfunded cash position
Cash budget before new financing
| Item | January £ | February £ | March £ |
|---|---|---|---|
| Opening cash / unfunded position | 5,000 | 6,000 | (8,600) |
| Net receipts less payments | 1,000 | (14,600) | 4,600 |
| Closing cash / unfunded position | 6,000 | (8,600) | (4,000) |
Negative balances show an unfunded requirement that the business still needs to address; they do not imply bank approval for an overdraft. March's positive net cash flow reduces the accumulated shortage but does not eliminate it.
4. Plan financing explicitly
Assume an illustrative facility can be drawn when needed, with no opening borrowing, and management wants at least £3,000 at each month-end. Borrow only enough to meet that minimum; repay available cash above it, up to the amount outstanding. Ignore interest/fees as specified above. In practice, availability, covenants and intra-month payment dates also need checking.
Funding schedule
| Item | January £ | February £ | March £ |
|---|---|---|---|
| Opening cash after prior financing | 5,000 | 6,000 | 3,000 |
| Net receipts less payments | 1,000 | (14,600) | 4,600 |
| Cash before this month's financing | 6,000 | (8,600) | 7,600 |
| New borrowing | 0 | 11,600 | 0 |
| Principal repayment | 0 | 0 | (4,600) |
| Closing cash | 6,000 | 3,000 | 3,000 |
| Closing borrowing | 0 | 11,600 | 7,000 |
February needs £11,600, not merely £8,600, to preserve the £3,000 minimum. March starts with the financed £3,000 balance. Do not carry the unfunded −£8,600 into the financed schedule as well.
5. Recalculate the unfunded budget
The optional cell below reproduces Section 3. Try changing the cash-sales share or equipment payment. Explain how the cash movements change, then revise the financing plan. The model covers three months and assumes one-month credit terms.
Monthly cash receipts and payments
6. Delayed-receipt practice
Twenty percent of the £18,000 credit collections due in February is delayed until March. Other collections, payments and financing assumptions remain unchanged. Recalculate receipts, February borrowing and March repayment. Does the delay change total January–March receipts?
Feedback
£3,600 moves from February to March. Receipts become £28,800 and £41,200 respectively. February net cash flow is −£18,200; cash before financing is −£12,200, so borrowing is £15,200 to reach £3,000. March net cash flow is £8,200; repay £8,200, leaving cash £3,000 and debt £7,000.
Quarterly receipts are unchanged at £94,000, but peak borrowing rises by £3,600. With real interest or fees, unchanged receipts would not guarantee unchanged total costs. A quarterly total alone conceals the February funding problem.
7. What the example tells us
A business starts with £10,000 and has net cash outflow of £3,000. Its closing cash is £7,000: a positive balance coexists with a negative flow. Conversely, March in Section 3 has a positive flow and negative unfunded balance. Neither observation establishes profit.
The delayed-receipt example isolates a timing effect: the same total receipts require more peak borrowing when some cash arrives later. To summarise a cash budget, identify when the shortage occurs, how large it is and what assumption drives it. If you suggest delaying a supplier payment, consider the agreed terms. A month-end surplus also does not rule out a shortage earlier in the month.
Extension: connect cash timing to growth
If purchases and wages must be paid before customers settle their invoices, expanding sales can increase the amount of cash tied up in the operating cycle. Higher sales alone therefore do not establish that the business can finance its growth. The effect depends on margins, inventory, payment terms and the timing of expansion.
Use working-capital ratios to investigate the collection and payment assumptions, then put those assumptions back into the monthly schedule. The ratios summarise patterns; the schedule locates the shortfall. For a longer-term project, capital budgeting adds a separate question: what are the future incremental cash flows worth at the chosen discount rate?