Management Accounting · Budget preparation

How to Prepare Overhead, Cash and Master Budgets

Updated 11 October 2026 · Fact-checked

A cash budget forecasts cash receipts and payments month by month, showing the closing cash balance. An overhead budget plans indirect costs. The master budget combines all functional budgets into a budgeted income statement, statement of financial position and cash budget. Solve by timing each flow, then removing non-cash items such as depreciation.

Understand Overhead, Cash and Master Budgets

A functional budget plans one area of the business, such as sales, production, materials, labour or overheads. Each one is a building block. The master budget pulls them all together into one plan for the whole organisation.

The master budget has three parts: the budgeted income statement, the budgeted statement of financial position and the cash budget. It shows whether the plan is profitable, what the business will own and owe at the period end, and whether it will have enough cash.

An overhead budget lists the indirect costs: production, selling, distribution and administration. Split them into fixed and variable. Variable overheads move with activity. Fixed overheads do not. Keep a note of non-cash items, mainly depreciation, because they matter for the cash budget.

The cash budget is about timing, not profit. A sale made in March may bring cash in May. A purchase made in March may be paid in April. Profit can be high while cash runs out. The cash budget shows when you need to borrow or can invest surplus cash.

The cash budget uses cash flows only. Depreciation, provisions and the book value of assets sold are never cash flows. Cash paid for a non-current asset is a cash flow, even though it is not an expense in the income statement.

Key formulas to remember

Closing cash balance: Opening cash + Receipts − Payments = Closing cash; Closing cash for one month becomes opening cash for the next. A negative figure is an overdraft.
Cash from credit sales: Cash received in a month = Sales of the earlier month(s) × % collected in that lag, adjusted for any discount; If 60% pay in the month after sale, then May cash from this group = April sales × 60%.
Cash paid to suppliers: Cash paid = Purchases of the month(s) before × credit terms; Use purchases, not production cost or sales. Take any settlement discount into account.
Cash overheads: Cash overheads = Total overheads − Depreciation (and other non-cash items); Also apply any payment lag, such as paid one month in arrears.
Closing receivables: Closing receivables = Credit sales not yet collected at the period end; This feeds the budgeted statement of financial position.
Closing payables: Closing payables = Credit purchases not yet paid at the period end; Check the credit terms to find which months are unpaid.
Budgeted closing retained earnings: Opening retained earnings + Budgeted profit − Dividends = Closing retained earnings; Use this to complete the equity section of the master budget.

How to solve Overhead, Cash and Master Budgets questions

Use this method for any cash budget or master budget question. Work in a clean table with one column per month.

1Read the question and list the months needed. Note the opening cash balance and any credit terms.
2Calculate cash receipts. Apply the percentage collected in each month to the correct month of sales. Deduct any discount taken.
3Calculate cash payments for purchases. Use the purchases budget and the payment lag.
4Work out cash overheads and wages. Remove depreciation and any other non-cash item. Apply any payment lag.
5Add other cash items: purchase or sale of non-current assets, tax, dividends, loan interest and loan receipts. Put them in the month paid.
6Total receipts and payments. Then calculate net cash flow, opening cash and closing cash for each month. Carry the closing balance forward.
7For a master budget, prepare the budgeted income statement from the functional budgets. Then build the statement of financial position using closing receivables, payables, inventory, asset values and cash.
8Check that the statement of financial position balances and that the cash figure matches the cash budget.

Quickest way: Month-by-month cash grid

When to use it: Use this for objective test questions asking for the cash balance or receipts in one particular month.

Identify only the month asked about. Ignore other months unless the balance is carried forward.
Write the receipts line first. Pick the correct earlier sales months and apply the percentages.
Write the payments line. Cross out depreciation immediately.
Check the date of each one-off item such as equipment, tax or dividends.
Calculate: receipts minus payments, then add the opening balance.
Sense-check the sign. Payments greater than receipts and opening cash means an overdraft.

Common mistakes in Overhead, Cash and Master Budgets

Including depreciation as a cash payment
It appears in the overhead budget, so it looks like a cost to pay.
Fix: Deduct depreciation from total overheads before putting overheads in the cash budget.
Using sales or purchases in the wrong month
Students forget the credit lag and use the current month.
Fix: Write the lag beside each line, such as 'sales of previous month', before calculating.
Ignoring the settlement discount
The discount is stated in a side note and is missed under time pressure.
Fix: Apply the discount only to customers who take it. Receipts = sales × % taking discount × (1 − discount rate).
Putting asset purchases through the income statement
Students confuse cash flow with expense.
Fix: A cash payment for equipment goes in the cash budget. Only its depreciation appears in the income statement.
Forgetting to carry the closing cash balance forward
Each month is treated as a separate calculation.
Fix: Make the closing balance of one month the opening balance of the next.
Treating the cash budget and the budgeted profit as the same
Both use sales and costs.
Fix: Profit uses the period in which sales and costs occur. Cash uses the period in which money moves.

Worked examples

Example 1

A company budgets credit sales of $40,000 in January, $50,000 in February and $60,000 in March. 30% of customers pay in the month of sale and 70% pay in the following month. Purchases are $24,000 in January, $28,000 in February and $30,000 in March, paid in the month after purchase. Overheads are $12,000 per month including $2,000 depreciation, and are paid in the month incurred. The opening cash balance on 1 March is $5,000. Calculate the closing cash balance for March.

Show the solution

Receipts in March: 30% × $60,000 = $18,000 from March sales.
70% × $50,000 = $35,000 from February sales. Total receipts = $18,000 + $35,000 = $53,000.
Payment to suppliers in March is for February purchases: $28,000.
Cash overheads = $12,000 − $2,000 = $10,000.
Total payments = $28,000 + $10,000 = $38,000.
Net cash flow = $53,000 − $38,000 = $15,000.
Closing cash = $5,000 + $15,000 = $20,000.

Answer: The closing cash balance for March is $20,000.

Example 2

A business has the following budget for April: credit sales $80,000, purchases on credit $45,000, cash overheads $14,000 and depreciation $3,000. Opening balances on 1 April: receivables $30,000, payables $20,000, cash $6,000. All receivables at 1 April are collected in April. 40% of April sales are collected in April, and the rest remain outstanding. All payables at 1 April are paid in April, and 25% of April purchases are paid in April. Calculate the budgeted closing cash balance, receivables and payables at 30 April.

Show the solution

Receipts: opening receivables $30,000 + 40% × $80,000 = $30,000 + $32,000 = $62,000.
Payments for purchases: opening payables $20,000 + 25% × $45,000 = $20,000 + $11,250 = $31,250.
Cash overheads are $14,000. Depreciation of $3,000 is not a cash flow.
Total payments = $31,250 + $14,000 = $45,250.
Net cash flow = $62,000 − $45,250 = $16,750.
Closing cash = $6,000 + $16,750 = $22,750.
Closing receivables = 60% × $80,000 = $48,000.
Closing payables = 75% × $45,000 = $33,750.

Answer: Closing cash is $22,750, closing receivables are $48,000 and closing payables are $33,750.

Exam tips

Draw the month columns first and write every lag next to the line before you calculate. Most lost marks come from using the wrong month.
In multiple response questions, look for which items belong in the cash budget. Depreciation, provisions and profit on disposal are the usual wrong options.
For number entry questions, show your working on scrap paper and check the sign. An overdraft may need a negative entry, so read the instruction.
In master budget questions, use the cash budget closing balance in the statement of financial position, and make sure the statement balances.
Be ready for a definition question: a functional budget covers one area, while the master budget combines all of them.

Practice questions from Budget preparation

Overhead, Cash and Master Budgets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Overhead, Cash and Master Budgets: frequently asked questions

What is the difference between a functional budget and a master budget?

A functional budget plans one activity, such as sales, production or labour. The master budget combines all functional budgets into a budgeted income statement, statement of financial position and cash budget for the whole organisation.

Why is depreciation left out of a cash budget?

Depreciation is an accounting charge that spreads the cost of an asset over its life. No cash leaves the business when it is recorded. The cash left the business when the asset was bought, so that payment is shown in the month it was paid.

What are the components of the master budget?

The master budget has three parts: the budgeted income statement, the budgeted statement of financial position and the cash budget. They are built from the functional budgets such as sales, production, materials, labour and overheads.

How do I deal with receivables and payables in a cash budget?

Use the credit terms to decide in which month cash is received or paid. Opening receivables and payables usually settle in the early months. Whatever is not settled by the period end becomes the closing receivables or payables in the statement of financial position.