Steps in Cash Budget Preparation

The cash budget is mainly prepared in five step process. The first step is determining opening cash balance, which helps to determine the firm availability of cash in the budget period for its activities. This is easy to determine as last month cash balance can be used for this purpose. The next step is to determine all the cash inflows (trading or non-trading) in which sales and other revenue sources are analyzed and cash inflows from them is measured. This step presents greatest number of obstacles for the small businesses due to changing nature of business and environment (Tulsian & Tulsian, 2009). It reduces the ability of small businesses to determine the accurate cash inflows, which may influence the results of cash budget and may lead towards less significant decision making.

Small businesses also face huge competition than large businesses, which also enables them to accurately forecast the sales and other revenue sources.  The next step is to determine all cash disbursements, which provides information about cash outflows. Most of the expenses are visible for the small firms, so it does not create any obstacle for small firms (Harvard Business School, 2009). Last step is to ascertain closing cash balance, which is the total of all above steps. It helps to determine the availability or lacking of cash in the business.

Steps in Avoiding Cash Crunch

Following are the major steps to avoid a cash crunch: Cash forecast: First step is to forecast the cash flows for future business needs that will enable the firm to determine all and outflows accurately. To improve the ability to forecast, the business should use contingency approach by facilitating a part for unseen circumstances that will be beneficial to face any cash crunch in future.

Revisit the cash forecast: If the forecast shows a liquidity problem in future, the business should revisit the cash forecast and should consider the expenses, which could be adjusted and eliminated. The firm should try to minimize the operating expenses by increasing operational efficiency (Weltman & Silberman, 2006).Identify the financial resources: The next step in avoiding cash crunch is to identify the financial resources, which can make the cash available to the companies at the time of cash requirements. For this, the firm should make the contract with different resources, which will be effective to avoid the cash crunch and to increase liquidity position of the firm (Pakroo, 2010). The proper identification of financial sources will be effective to support the management plan.


  • Tulsian, P.C. & Tulsian, S.D. (2009). Comm. Studies & Application 10. Ratna Sagar.
  • Harvard Business School. (2009). Preparing a budget: expert solutions to everyday challenges. UK: Harvard Business Press.
  • Weltman, B. & Silberman, J. (2006). Small Business Survival Book: 12 Surefire Ways for Your Business to Survive and Thrive. USA: John Wiley & Sons.
  • Pakroo, P.H. (2010). The Small Business Start-Up Kit for California (8th ed.). USA: Nolo.

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