A cash budget is a finance tool geared toward limiting a company's expenditures to the amount of cash it actually has available. The alternative to a cash budget is one that is based on the availability of credit, or money that will have to be repaid down the line.
The most immediate practical benefit of a cash budget is restricting your spending so you do not incur debt. A cash budget involves a realistic assessment of how much money you will have coming in during an upcoming period. Your determinations of how much money your business has available to spend are based on these forecasts, forcing you to spend within your means. It forces you to restrict discretionary purchases to items that you can pay for out of the cash you have on hand.
A cash budget also provides the benefit of forcing you to think critically about your company's financial situation and make realistic predictions. This process is useful to you as a business owner working to maintain an accurate sense of your company's operations. When you prepare a cash budget, look closely at past patterns and use them to forecast future business activity. This exercise familiarizes you with the rhythms of your company's sales and expenditures, as well as variables that can affect changes.
A cash budget can help to prepare you financially for seasonal fluctuations in sales and expenditures. If you are required to renew expensive licenses at a particular time of year, for example, a cash budget can help you to set aside money over time for these outlays. Preparing a cash budget can help you to identify times of year when you may have a surplus to put aside to prepare yourself for leaner periods.
A cash budget provides you with a basis for comparing your predictions and assumptions with actual events as they unfold. Your cash budget is not a plan set in stone, but rather a flexible road map meant to keep your spending on track if everything goes as planned. As the period covered in your cash budget elapses, you will find that some of your income and spending predictions were off base. These discrepancies provide you with valuable feedback. Sometimes they occur because of circumstances that you could not have foreseen, but just as often they are the result of faulty reasoning that you can correct in the future.