Financial Management and Business Data Analytics · Management of Cash and Cash Equivalents

How to Prepare a Cash Budget for CMA Inter

Updated 10 October 2026 · Fact-checked

A cash budget is a forecast of cash receipts and cash payments for each period, showing the closing cash balance. To solve it, list opening cash, add cash receipts, subtract cash payments, ignore non-cash items such as depreciation, then compare closing cash with the minimum balance to find a surplus or deficit.

Understand Cash Budget and Cash Forecasting

A cash budget is a period-wise estimate of the cash coming in and going out of a business. It is usually made monthly, sometimes weekly, for the next few months. Its purpose is simple: to tell the finance manager in advance whether cash will be short or in excess.

Profit and cash are different things. A firm can show profit and still run out of cash because customers pay late, stock is built up, or a machine is bought. The cash budget tracks only actual cash movement, so it catches this problem early.

The most common method in exams is the receipts and payments method. You list every expected cash receipt (cash sales, collections from debtors, asset sales, loans, share capital) and every expected cash payment (creditors, wages, expenses, capital purchases, tax, dividend, loan repayment). Then you find the net cash flow and add it to the opening balance. Anything that does not involve cash, such as depreciation, provision or writing off, is left out.

Other short-term forecasting methods exist. The adjusted net income method starts from expected profit and adjusts for non-cash items and changes in working capital. The proforma balance sheet method builds a forecast balance sheet, and cash comes out as the balancing figure. The receipts and payments method is the most detailed and the best for short periods. The other two suit longer periods.

The last step is interpretation. Compare the closing balance with the minimum cash balance the firm wants to keep. A shortfall means you must arrange short-term finance, such as a bank overdraft or by speeding up collections. A surplus above the minimum can be invested in short-term instruments or used to repay borrowings.

Key rules to remember

Closing cash balance: Closing cash = Opening cash + Total cash receipts − Total cash payments; The closing balance of one period becomes the opening balance of the next.
Surplus or deficit: Surplus / (Deficit) = Closing cash − Minimum cash balance required; If no minimum balance is given, compare closing cash with zero.
Collection from credit sales: Collection in a month = Σ (Sales of earlier month × % collected after that lag); Add the cash-sale share of the current month. Use the lag given, such as 1 or 2 months.
Receipt net of cash discount: Cash received = Invoice amount × (1 − discount rate); Apply the discount only to the portion that is paid early.
Payment to creditors: Payment in a month = Purchases of the month that falls due after the credit period; With one month of credit, this month pays last month's purchases.
Cash expense from total expense: Cash expense = Total expense − Non-cash items (depreciation, amortisation, provisions); Non-cash items never appear in the cash budget.
Adjusted net income method: Cash flow = Net income + Non-cash charges ± Changes in working capital items; A rough method for longer periods. It is less detailed than receipts and payments.

How to solve Cash Budget and Cash Forecasting questions

Use the same layout for every cash budget question. It keeps your working clean and earns step marks even if one figure is wrong.

1Read the question once and note the opening cash, the minimum cash balance and the months asked for.
2Draw columns for each month. Make rows for opening balance, receipts, total receipts, payments, total payments, and closing balance.
3Prepare working notes first for collections from debtors (including the lag and any discount) and for payments to creditors (including the credit period).
4Fill in receipts: cash sales, collections, and other inflows such as asset sales, loans or share issue, in the month they actually arrive.
5Fill in payments: creditors, wages, expenses, capital items, tax, dividend and loan repayments in the month they are actually paid. Leave out depreciation and other non-cash items.
6Calculate closing cash for each month and carry it forward as the next month's opening cash.
7Compare each closing balance with the minimum balance. State the surplus or deficit clearly.
8Write a short comment: how a deficit can be financed or how a surplus can be used.

Quickest way: Working-note first, then fill the grid

When to use it: Use this for any monthly cash budget with lagged collections and payments, especially when time is short.

Write the sales and purchases figures in a single row across the months, including earlier months needed for the lag.
Compute the collection row and the creditors payment row in one pass using the percentages and lags given.
Strike out depreciation and any other non-cash item in the question so you do not use it by mistake.
Put each remaining payment in its payment month on the grid. Pay special attention to one-time items such as machinery, tax and dividend.
Total receipts and payments, then calculate closing balances month by month. Check that each opening balance equals the previous closing balance.
Mark each month as surplus or deficit against the minimum balance and write the one-line action.

Common mistakes in Cash Budget and Cash Forecasting

Including depreciation as a cash payment
Students copy the total overheads figure without reading the note that part of it is depreciation.
Fix: Underline any non-cash item in the question and deduct it from overheads before putting the figure in the budget.
Showing sales and purchases in the month of the transaction instead of the month of cash movement
Students treat the cash budget like a profit statement.
Fix: Ask for every item: in which month does the cash actually move? Use the credit period and the collection pattern to place it.
Forgetting earlier months' sales or purchases for the lag
The question gives sales for months before the budget period, and students ignore them.
Fix: List the lag months in the working note. April collections with a two-month lag need February sales.
Applying the cash discount to the whole sales figure
Students read 'discount' and apply it to every rupee of sales.
Fix: Apply the discount only to the share paid within the discount period, and compute that portion first.
Not carrying the closing balance forward correctly
A small arithmetic slip in one month, or restarting with the original opening cash.
Fix: Write the opening balance of each month as 'closing balance of previous month' and tick it off before moving on.
Stopping at the closing balance without comment
Students think the numbers are the whole answer.
Fix: Add two lines: which months show a deficit or surplus against the minimum balance, and what the firm should do about each.

Worked examples

Example 1

Prepare a monthly cash budget for April to June from the following. Opening cash on 1 April is ₹50,000. The minimum cash balance to be kept is ₹40,000. Sales: March ₹2,40,000; April ₹3,00,000; May ₹2,80,000; June ₹3,20,000. 30% of sales are for cash and 70% are on credit, collected in the following month. Purchases: March ₹1,40,000; April ₹1,60,000; May ₹1,50,000; June ₹1,70,000, each paid in the following month. Wages are ₹40,000 a month, paid in the same month. Overheads are ₹30,000 a month including depreciation of ₹5,000, paid in the same month. A machine costing ₹1,50,000 will be bought and paid for in May.

Show the solution

Collections: April = 30% of 3,00,000 = 90,000, plus 70% of March 2,40,000 = 1,68,000. Total ₹2,58,000.
May = 30% of 2,80,000 = 84,000, plus 70% of April 3,00,000 = 2,10,000. Total ₹2,94,000.
June = 30% of 3,20,000 = 96,000, plus 70% of May 2,80,000 = 1,96,000. Total ₹2,92,000.
Cash overheads = 30,000 − 5,000 depreciation = ₹25,000 a month.
April payments = creditors (March purchases) 1,40,000 + wages 40,000 + overheads 25,000 = ₹2,05,000.
May payments = creditors (April purchases) 1,60,000 + wages 40,000 + overheads 25,000 + machine 1,50,000 = ₹3,75,000.
June payments = creditors (May purchases) 1,50,000 + wages 40,000 + overheads 25,000 = ₹2,15,000.
April: opening 50,000 + receipts 2,58,000 − payments 2,05,000 = closing ₹1,03,000.
May: opening 1,03,000 + receipts 2,94,000 − payments 3,75,000 = closing ₹22,000.
June: opening 22,000 + receipts 2,92,000 − payments 2,15,000 = closing ₹99,000.
Against the minimum of ₹40,000: April surplus ₹63,000; May deficit ₹18,000; June surplus ₹59,000.

Answer: Closing cash is ₹1,03,000 (April), ₹22,000 (May) and ₹99,000 (June). May is ₹18,000 below the minimum balance, so arrange short-term finance such as a bank overdraft for May. The April and June surpluses can be kept for this need or invested short term.

Example 2

A firm has credit sales of: February ₹5,00,000; March ₹6,00,000; April ₹5,00,000; May ₹7,00,000. Customers pay 20% in the month of sale and get a 2% discount on that portion, 50% in the next month, and 30% in the second month. Purchases each month equal 50% of that month's sales and are paid in the following month. Salaries are ₹60,000 and rent ₹20,000 each month, paid in the month. An advance tax payment of ₹80,000 is made in May. Opening cash on 1 April is ₹30,000. Prepare the cash budget for April and May.

Show the solution

April collections: 20% of 5,00,000 = 1,00,000, less 2% discount (2,000) = 98,000. Add 50% of March 6,00,000 = 3,00,000. Add 30% of February 5,00,000 = 1,50,000. Total ₹5,48,000.
May collections: 20% of 7,00,000 = 1,40,000, less 2% discount (2,800) = 1,37,200. Add 50% of April 5,00,000 = 2,50,000. Add 30% of March 6,00,000 = 1,80,000. Total ₹5,67,200.
Purchases: March = 50% of 6,00,000 = 3,00,000. April = 50% of 5,00,000 = 2,50,000.
April payments = creditors (March purchases) 3,00,000 + salaries 60,000 + rent 20,000 = ₹3,80,000.
May payments = creditors (April purchases) 2,50,000 + salaries 60,000 + rent 20,000 + advance tax 80,000 = ₹4,10,000.
April: opening 30,000 + receipts 5,48,000 − payments 3,80,000 = closing ₹1,98,000.
May: opening 1,98,000 + receipts 5,67,200 − payments 4,10,000 = closing ₹3,55,200.

Answer: Closing cash is ₹1,98,000 at the end of April and ₹3,55,200 at the end of May. Cash is building up, so the firm has a growing surplus. It can invest the excess in short-term instruments or reduce short-term borrowing, while keeping enough for future needs.

Exam tips

Show a clear working note for collections and for creditors payments. Examiners give step marks for these even if the final balance is wrong.
Read every note in the question for non-cash items, one-time payments and different payment lags, because these are the usual traps.
Always carry forward the closing balance as the next month's opening balance and show it on the page.
If the question gives a minimum cash balance, show the surplus or deficit as a separate row, and add a one-line recommendation.
In MCQs, expect questions such as which item is excluded from a cash budget or what the closing balance is for one month. Compute only that month and its lag items.

Practice questions from Management of Cash and Cash Equivalents

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 CMA Intermediate?

List opening cash balance, then cash receipts with a total, then cash payments with a total, and end with the closing balance for each month. Many questions also ask for a surplus or deficit row against a minimum balance. Put the working notes for collections and payments below the grid.

Why is depreciation not shown in a cash budget?

Depreciation is an accounting charge that does not involve any cash going out. A cash budget records only actual cash receipts and payments. If an overhead figure includes depreciation, deduct it before entering the amount.

What is the receipts and payments method of cash forecasting?

It estimates each cash inflow and outflow for the period and finds the net cash flow. It is the most detailed method and is best for short periods, such as the next few weeks or months. This is the method most exam questions use.

What should I do if the cash budget shows a deficit?

Compare the closing balance with the minimum balance and state the shortfall. Then suggest ways to cover it, such as a bank overdraft or short-term loan, faster collection from debtors, or delaying a non-urgent payment. Keep the comment short and tied to the figures.