The Importance of Cash and Cash Management

Management of cash is the primary concern of most entrepreneurs when they start a business. How will they ensure they collect funds in time to pay their bills? Cash management is also a key concern for most households. For example, I may know that I make enough money to pay all my bills, but if the timing of when the cash hits my bank versus when my bills are due isn't in sync, I run the risk of penalties or worse.

Components of the Cash Budget

The cash budget includes the beginning balance, detail on payments and receipts, and an ending balance.


Learning Objective

  • Identify the different components of a cash budget

Key Points

  • The cash flow budget helps the business determine when its income will be sufficient to cover its expenses and when the company will need to seek outside financing.
  • Components - major classes include cash receipts and payments.
  • Cash receipts include cash generated from operations, cash receipts from customers, proceeds from the sale of equipment, dividends received, and other income.
  • Cash payments include cash paid to suppliers, cash paid to employees, purchase of assets, payments related to mergers and acquisitions, interest paid, income taxes paid, dividends paid, and other payments.

Key Terms

  • stockholders: A shareholder or stockholder is an individual or institution (including a corporation) that legally owns a share of stock in a public or private corporation.
  • mergers and acquisitions: Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance, and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly, whether in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity, or using a joint venture.

Cash Budget

A cash budget is a prediction of future cash receipts and expenditures for a particular time period, usually in the near future. The cash flow budget helps the business determine when its income will be sufficient to cover its expenses and when the company will need to seek outside financing.

A Sample Balance Sheet: One of the assets listed is cash, which factors into the overall budget.


Components: Major classes include cash receipts and payments.

Cash Balance, Beginning of the Year

Cash Receipts

  1. Cash generated from operations
  2. Cash receipts from customers - Collecting the accounts receivable. Accounts receivable, also known as Debtors, is money owed to a business by its clients (customers) and shown on the business's balance sheet as an asset. It is one of a series of accounting transactions dealing with the billing of a customer for goods and services that the customer has ordered.
  3. Proceeds from the sale of equipment
  4. Dividends received: Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders.
  5. Other income: Other investment or other interest income, etc.

Cash Payments

  1. Cash paid to suppliers
  2. Cash paid to employees - Salary, wages expenses.
  3. Purchase of asset - Equipment, machine, real estate, etc.
  4. Payments related to mergers and acquisitions
  5. Interest paid - Interest of short-term or long-term debt.
  6. Income taxes paid
  7. Dividends paid - Paying dividends to shareholders or investors.
  8. Debt paid - Short term or long term debt principle.
  9. Other payment - Which includes Advertising, Selling expenses, Administrative expense, Insurance expenses, Rent expenses, etc.

Net increase in cash and cash equivalents

Cash balance, end of year