Financial Management and Strategic Management · Treasury and Cash Management

Cash Budget and Cash Forecasting for CA Intermediate FM

Updated 4 October 2026 · Fact-checked

A cash budget is a month-wise statement of expected cash receipts and payments. You list all cash inflows, subtract all cash outflows, add the opening balance, and get the closing balance. A negative or low closing balance shows a deficit to be financed; a high one shows a surplus to invest.

Understand Cash Budget and Cash Forecasting

A cash budget is a forecast of cash inflows and outflows over a period, usually month by month. It tells the firm when cash will be short and when it will be in excess. This lets the treasury arrange a loan in time or invest idle money.

Profit is not cash. Credit sales, depreciation, provisions and outstanding expenses affect profit but not cash in the same period. So a cash budget works only with actual cash movements, and only in the month they happen.

The most common method is the receipts and payments method. You list cash receipts (cash sales, collections from debtors, interest and dividends received, asset sale proceeds, capital raised) and cash payments (purchases paid, wages, expenses, capital expenditure, tax, dividends, loan repayments). The difference is the net cash flow. Adding the opening balance gives the closing balance.

The closing balance is compared with the minimum cash balance the firm wants to keep. If closing cash is below the minimum, there is a deficit to be financed. If it is above, there is a surplus to invest in short-term instruments.

Cash forecasting is the wider activity. Short-term forecasts use receipts and payments. Other methods, such as the adjusted net income method and the proforma balance sheet method, are used for longer periods. In exams, the receipts and payments format is what you will mostly be asked to prepare.

Key rules to remember

Net cash flow: Net cash flow = Total cash receipts − Total cash payments; Calculated for each month. Only cash items are included.
Closing cash balance: Closing balance = Opening balance + Total receipts − Total payments; The closing balance of one month is the opening balance of the next.
Surplus or deficit: Surplus or (deficit) = Closing balance before financing − Minimum cash balance; A negative result is the amount to be financed. A positive result can be invested.
Collections from credit sales: Collection in month = Credit sales of the earlier month (shifted back by the credit period) × percentage collected as per the collection pattern; If the credit period is 2 months, sales of January are collected in March. Apply discounts and bad debts if given.
Payment for credit purchases: Payment in month = Purchases of the earlier month according to the credit period; A one-month credit period means March payment is for February purchases.

How to solve Cash Budget and Cash Forecasting questions

Use the same layout for every cash budget question. It keeps your working clear and earns step marks.

1Read the data and note the period, opening cash balance, minimum cash balance and credit terms for sales and purchases.
2Prepare supporting workings first: a schedule of cash collections from sales and a schedule of payments for purchases, wages and expenses.
3Remove all non-cash items such as depreciation, provisions, and outstanding or prepaid amounts. Also keep out bad debts and discount allowed that do not involve cash.
4Draw the cash budget with months as columns. Put receipts at the top, then payments, then net cash flow.
5Add the opening balance to net cash flow to get the closing balance for each month. Carry it forward as the next month's opening balance.
6Compare the closing balance with the minimum cash balance. State the surplus or deficit for each month.
7Write a short conclusion on financing the deficit or investing the surplus, if the question asks for it.

Quickest way: Row-by-row cash budget with workings below

When to use it: Use this under time pressure when the question gives a sales pattern and several payment items over 3 to 6 months.

For MCQs, check first whether the item is cash. Depreciation and provisions are never cash, so you can ignore any option that includes them.
For MCQs on collections, find which month's sales fall in the target month by shifting by the credit period. Then apply the collection percentages.
In the written answer, draw the full table once. Show the debtor and creditor workings below it, so the examiner can give method marks even if a number is wrong.
Total each column, then compute the closing balance. Check that each opening balance equals the previous closing balance.
Write one line on the conclusion, for example 'The firm needs ₹X of short-term finance in March.' Do not skip it.

Common mistakes in Cash Budget and Cash Forecasting

Including depreciation or provisions as a cash payment
Students copy every expense from the profit and loss data.
Fix: Ask whether money leaves the bank in that month. Depreciation, bad debts written off and provisions do not.
Showing sales in the month of sale when they are credit sales
Students forget the credit period.
Fix: Shift credit sales forward by the credit period. Only cash sales are received in the month of sale.
Ignoring the discount on early payment
The discount is given in a note and is missed.
Fix: Collect the discounted amount, such as 98% of the invoice, in the month the discount applies. Reduce the receipt by the discount.
Not carrying the closing balance forward
Each month is treated separately.
Fix: Write the previous closing balance as the opening balance. Check it every month.
Forgetting the minimum cash balance when stating the deficit
Students stop at the closing balance.
Fix: Use Surplus/(deficit) = Closing balance − Minimum balance. If the result is negative, the amount to finance is its absolute value.
Paying wages and expenses in the wrong month
Lag terms like 'paid in the following month' are missed.
Fix: Underline the payment timing in the question and mark each item with its payment month before you start.

Worked examples

Example 1

A firm's sales are: January ₹2,00,000, February ₹2,40,000, March ₹3,00,000, April ₹2,60,000. 25% of sales are for cash and 75% on credit. Credit sales are collected in the month after sale. Purchases are ₹1,20,000 in January, ₹1,50,000 in February and ₹1,80,000 in March, paid in the month after purchase. Wages of ₹30,000 per month and expenses of ₹20,000 per month are paid in the month incurred. Opening cash on 1 March is ₹40,000. Prepare the cash budget for March and April. (April purchases are paid in May, so they do not affect this budget.)

Show the solution

March receipts: cash sales = 25% × ₹3,00,000 = ₹75,000. Collection of February credit sales = 75% × ₹2,40,000 = ₹1,80,000. Total receipts = ₹2,55,000.
March payments: purchases of February paid = ₹1,50,000. Wages ₹30,000. Expenses ₹20,000. Total = ₹2,00,000.
March net cash flow = ₹2,55,000 − ₹2,00,000 = ₹55,000. Closing balance = ₹40,000 + ₹55,000 = ₹95,000.
April receipts: cash sales = 25% × ₹2,60,000 = ₹65,000. Collection of March credit sales = 75% × ₹3,00,000 = ₹2,25,000. Total = ₹2,90,000.
April payments: purchases of March paid = ₹1,80,000. Wages ₹30,000. Expenses ₹20,000. Total = ₹2,30,000.
April net cash flow = ₹2,90,000 − ₹2,30,000 = ₹60,000. Closing balance = ₹95,000 + ₹60,000 = ₹1,55,000.

Answer: Closing cash is ₹95,000 at the end of March and ₹1,55,000 at the end of April.

Example 2

A company has an opening cash balance of ₹50,000 on 1 April. It expects the following for April: cash receipts of ₹3,20,000 from debtors and ₹40,000 from sale of old machinery; payments of ₹2,10,000 to creditors, ₹60,000 for wages, ₹25,000 for expenses, ₹90,000 for new equipment, and ₹15,000 as depreciation (included in costs). The company wants to keep a minimum cash balance of ₹60,000. Find the surplus or deficit and the amount to be financed.

Show the solution

Total receipts = ₹3,20,000 + ₹40,000 = ₹3,60,000.
Depreciation is non-cash, so exclude it.
Total payments = ₹2,10,000 + ₹60,000 + ₹25,000 + ₹90,000 = ₹3,85,000.
Net cash flow = ₹3,60,000 − ₹3,85,000 = −₹25,000.
Closing balance = ₹50,000 − ₹25,000 = ₹25,000.
Compare with the minimum balance: ₹25,000 − ₹60,000 = −₹35,000, a deficit.

Answer: The closing cash balance is ₹25,000, which is ₹35,000 below the minimum. The company must arrange short-term finance of ₹35,000.

Exam tips

Draw the table first and put workings below it. Step marks are given for the collection and payment schedules.
Read every note on timing, such as 'paid in the following month' or 'discount of 2% if paid within the month', before filling any figure.
State assumptions in one line if the question is silent, for example 'Assumed that all purchases are on credit.'
Always end with the surplus or deficit against the minimum cash balance, and say how you would finance or invest it.
In MCQs, remove non-cash items quickly and compute only the month asked for. There is no negative marking, so always attempt.

Practice questions from Treasury and Cash Management

Cash Budget and Cash Forecasting in other exams

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

Cash Budget and Cash Forecasting: frequently asked questions

What is the format of a cash budget in the ICAI exam?

There is no fixed format. Use months as columns, list receipts first, then payments, then net cash flow, opening and closing balance. Show workings for collections and payments below the table.

Is depreciation included in a cash budget?

No. Depreciation is a non-cash expense, so it never appears in a cash budget. Only the actual cash outflow for buying the asset is shown.

What is the difference between a cash budget and cash forecasting?

A cash budget is a detailed plan of receipts and payments for a short period, usually monthly. Cash forecasting is the broader estimate of future cash position and may use other methods, such as the adjusted net income method, for longer periods.

How do I find the financing needed from a cash budget?

Compare each month's closing balance with the minimum cash balance. If the closing balance is lower, the difference is the amount to finance. If it is higher, that excess is surplus cash available to invest.