Budgeting and Cash Flow Management (SACE Stage 2 Accounting)
“Prepare and use budgets, especially the cash budget, to plan, control and make decisions for a business”
A budget is a financial plan expressed in dollars. The cash budget forecasts cash receipts and payments period by period to predict the closing cash balance, so a business can anticipate shortfalls, arrange finance, and plan with confidence: .
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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.
A budget is a financial plan prepared in advance for a defined future period, setting out expected revenues, costs, receipts or payments against which actual performance can later be compared.
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.
The closing balance of one period becomes the opening balance of the next. A negative closing balance signals a cash shortfall that must be funded.
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.
Cash budget for a small business, July to September
Opening cash at 1 July is . Forecast receipts and payments:
| July | August | September | |
|---|---|---|---|
| Cash receipts | 30,000 | 28,000 | 35,000 |
| Cash payments | 32,000 | 33,000 | 30,000 |
- July
- closing.
- August
- opening closing.
- September
- opening closing.
The budget reveals a forecast cash deficit of at the end of August. Because this is known in advance, the owner can act now: arrange a short-term overdraft, delay a payment, or chase debtors faster. By September the position recovers to a surplus. Without the budget, the August shortfall would have been an unwelcome surprise.
The schedule of collections from debtors
The trickiest part of a SACE cash budget is timing the collection of credit sales, which is set out in a schedule of collections from debtors. Customers rarely pay in the month of sale; a typical pattern is that a percentage pays in the month after sale, a smaller percentage the month after that, and a residual is written off as bad debts and never collected. To build the schedule, list the credit-sales months down the side and the collection months across the top, then apply each percentage to the relevant sales figure and total each collection column. Crucially, the bad-debt percentage is excluded entirely because no cash is ever received for it. The column totals then flow straight into the cash receipts section of the budget, so an error in the schedule cascades into a wrong closing bank balance.
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.
If the cash budget forecasts a surplus, the business can consider investing the excess, repaying debt early, or funding expansion. If it forecasts a deficit, the priority is arranging finance or rescheduling payments before the shortfall arrives.
Including non-cash items or accrual figures in a cash budget. Depreciation is never a cash payment, so it must be excluded. Likewise, a credit sale is a receipt only in the period the customer actually pays, not when the sale is made. Mixing the accrual basis into a cash budget produces a closing balance that will not match the bank.
Exam-style questions
Questions in the style of SACE Board exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
2022 SACE Stage 2-style12 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 $85,000 food truck is bought with 25% paid in November; interest received $10,000 in October; loan repayments $12,000 per year; depreciation $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 $400 depreciation (a non-cash item), monthly loan repayment of $12,000 / 12 = $1,000, the $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 2-style3 marksPrepare the schedule of collections from debtors for Kyandi's Kreations for April, May and June 2025. (Credit sales: February $15,000, March $18,000, April $25,000, May $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 ($14,400) + 15% of February ($2,250) = $16,650.
May receipts = 80% of April ($20,000) + 15% of March ($2,700) = $22,700.
June receipts = 80% of May ($20,000) + 15% of April ($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 2-style2 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.
Practise this
Sources & how we know this
- Stage 2 Accounting subject outline (2025 onwards) — SACE Board
- Stage 2 Accounting: external assessment — SACE Board