The development of a cash budget for a business begins with ascertaining the starting on-hand cash position of the company. Next, management must determine the company's cash intake and cash outflow. Determining these allows senior management to ascertain their ending cash balance for a particular period. The cash budget enables a company to control cash outflow and inflow. Knowing where money is going, and where cash is coming from allows a business to monitor the liquidity of their organization and helps in decision-making for purchases, marketing programs, hiring, expansion, and more
A business's opening cash position is actually their closing cash position from the prior period. To this opening cash position they then add cash received from sales, whether the selling of goods or services. However, to arrive at their true closing cash position they must subtract any disbursements (expenses - fixed and variable) made in a particular period. This may be disbursements for inventory, raw materials in the case of a manufacturing enterprise, rent payments, along with a host of other disbursements.
Cash budgets enable business enterprises to determine whether they have enough cash on hand to meet the covenants stated in their banking agreements. They also enable businesses to see where they may be wasting money. The cash budget is an effective tool for recognizing danger ares where a company may be letting cash seep away from them unnecessarily.