How do budgets and cash flow forecasts help a business plan and stay solvent?
Prepare and use budgets, especially the cash budget, to plan, control and make decisions for a business
A budget is a financial plan. The cash budget forecasts receipts and payments to predict shortfalls and surpluses, helping a business stay solvent and make planning decisions.
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What this dot point is asking
You need to explain the purpose of budgeting, prepare a cash budget, and use it to make decisions about a business's cash position.
What a budget is and why it matters
A budget is a quantified plan for a future period. Budgeting supports four management functions:
- Planning: setting targets for sales, costs and cash.
- Coordinating: aligning the parts of a business toward common goals.
- Controlling: comparing actual results against budget to find variances.
- Decision making: deciding whether the business can afford spending, or needs finance.
The cash budget
The cash budget (cash flow forecast) is the most important budget for short-term survival because a business that runs out of cash cannot pay its debts, even if it is profitable.
Cash receipts and payments are recorded when cash actually moves, not when revenue is earned or an expense is incurred. This is the cash basis, and it is what makes the cash budget different from a budgeted income statement. Credit sales appear only when customers pay; depreciation, being a non-cash expense, never appears in a cash budget at all.
Using the budget for control
Once the period is over, actual receipts and payments are compared with the budget. A variance is the difference between budgeted and actual figures. A favourable variance improves cash (higher receipts or lower payments); an unfavourable variance worsens it. Investigating variances shows whether forecasts were unrealistic or whether the business is off plan, and informs the next budget.
Profit is not cash
A core decision-making insight is that profit and cash differ. A business can report a profit while its cash falls, because credit sales, inventory purchases, asset purchases, loan repayments and drawings all move cash without matching the profit figure. The cash budget manages this risk directly.
Exam-style practice questions
Practice questions written in the style of SACE Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
2022 SACE Stage 212 marksPrepare the cash budget for The Vegan Vanguard for October and November 2022, including estimated cash receipts, estimated cash payments, the surplus or deficit, and the opening and closing bank balances. (Debtors pay 70% in the month after sale and 30% the following month; purchases and expenses are paid as incurred; a 10,000 in October; loan repayments 400 per month is non-cash.)Show worked answer →
Build the budget month by month in three sections.
Cash receipts: collections from debtors (apply 70% of the prior month plus 30% of the month before that to each month's credit sales), cash sales, and one-off receipts such as the $10,000 interest in October.
Cash payments: purchases (less the 4% discount), wages (adjust for the accrual at the start and end so only cash paid is shown), other expenses excluding the 12,000 / 12 = 2,650 insurance in November, and 25% of the food truck ($21,250) in November.
For each month: surplus or deficit = total receipts - total payments. Opening bank balance for October comes from the bank reconciliation; the closing balance carries forward as November's opening balance.
Markers reward correct debtor timing, excluding depreciation, including only the cash portion of the truck, and the closing balance flowing from one month to the next.
2024 SACE Stage 23 marksPrepare the schedule of collections from debtors for Kyandi's Kreations for April, May and June 2025. (Credit sales: February 18,000, April 25,000. Debtors pay 80% in the month after sale, 15% in the second month after sale, and the remainder is written off as bad debts.)Show worked answer →
For each month's credit sales, spread the cash collected across the following months using the payment pattern (80% next month, 15% the month after, 5% bad debt never collected).
April receipts = 80% of March (2,250) = $16,650.
May receipts = 80% of April (2,700) = $22,700.
June receipts = 80% of May (3,750) = $23,750.
Lay these in a schedule with sales months down the side and collection months across the top, then total each column to feed the cash budget.
Markers reward applying the percentages to the correct earlier months, excluding the 5% bad debts entirely, and totalling each collection month correctly.
2022 SACE Stage 22 marksImplementation of a cash budget comprises three stages: forecasting, planning and control. Choose one of the three stages and discuss its role and importance in the cash-budget process.Show worked answer →
Pick one stage and explain its purpose and why it matters.
- Forecasting: estimating future receipts and payments using past data and expected conditions. It is important because the whole budget rests on realistic predictions; poor forecasts make every later decision unreliable.
- Planning: using the forecast to organise activities, for example timing large purchases, arranging finance before a predicted shortfall, or scheduling drawings. It turns the numbers into action and helps the business stay solvent.
- Control: comparing actual results with the budget through variance analysis, then investigating and acting on differences. It is important because it lets the owner correct problems early and improve the accuracy of future budgets.
Markers reward a clear description of the chosen stage and a genuine reason it matters to managing cash, not just a definition.