How do organisations forecast their cash, and what can they do when they face a shortfall?
Cash budgeting: the purpose of a cash budget, interpreting receipts, payments, net cash flow and closing balance, identifying cash flow problems, and the solutions to a shortfall.
An SQA Higher Business Management answer on cash budgeting, covering the purpose of a cash budget, how to interpret receipts, payments, net cash flow and the closing balance, how to identify cash flow problems, and the solutions a firm can use to improve cash flow.
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What this key area is asking
A business can be profitable yet still run out of cash, so the SQA wants you to understand the cash budget: its purpose, how to read its receipts, payments, net cash flow and closing balance, how to spot cash flow problems, and the solutions to a shortfall. Higher rewards you for interpreting a budget and recommending realistic actions.
The purpose of a cash budget
The purpose is to plan and control cash so the firm always has enough to pay its bills (stays liquid). A cash budget:
- shows in advance when cash will run short, so the firm can arrange an overdraft or loan early;
- shows when there is a surplus, which can be planned for investment or expansion rather than left idle;
- acts as a target for control, comparing actual against forecast;
- reassures lenders, making borrowing easier.
Reading a cash budget
A cash budget has a standard structure for each period (month):
Reading down the months, you can see the cash position building up (surplus) or running down (towards a shortage), and pinpoint when a problem will occur.
Identifying cash flow problems
A cash flow problem shows up as a negative net cash flow (more going out than coming in) and especially a negative closing balance (the firm has run out of cash and is overdrawn). Common causes are: paying out before being paid (buying stock or paying wages before customers pay), giving customers too much credit, holding too much stock, overtrading (expanding too fast), or a fall in sales.
Solutions to a cash shortfall
Examples in context
Example 1. A seasonal firm planning for a quiet period. A firm selling garden furniture has high sales in spring but low sales in winter. Its cash budget forecasts a cash shortage over the winter months, so the firm arranges an overdraft in advance, builds up a surplus in the busy season, and delays spending until cash recovers. Because the budget showed the problem early, the firm avoids being caught short, the classic benefit of cash budgeting for a seasonal business.
Example 2. A growing firm overtrading. A rapidly expanding firm buys lots of stock and gives customers generous credit, so cash flows out (stock, wages) before it flows in (customer payments). Its cash budget shows a negative closing balance despite rising sales (overtrading). It solves this by reducing credit to customers, cutting stock, and arranging an overdraft, showing how a profitable, growing firm can still face a cash flow problem that a cash budget reveals.
Try this
Q1. Explain what is meant by net cash flow in a cash budget. [2 marks]
- Cue. Net cash flow is total receipts (cash in) minus total payments (cash out) for the period; it is positive if more cash comes in than goes out, and negative if more goes out than comes in.
Q2. Describe two actions a business could take to improve its cash flow when a shortage is forecast. [4 marks]
- Cue. Arrange an overdraft or loan; negotiate longer credit with suppliers or delay spending; speed up receipts with prompt-payment discounts or less customer credit; sell surplus assets; reduce stock; cut costs (any two, developed).
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA Higher style4 marksDescribe the benefits to a business of preparing a cash budget.Show worked answer →
Worth 4 marks. Describe the benefits, one mark each for a developed point.
Identifies cash shortages in advance (1 mark). A cash budget forecasts when cash will run low, so the firm can arrange finance, such as an overdraft, before the problem hits.
Identifies surpluses (1 mark). It shows when there is spare cash, which the firm can plan to invest or use for expansion rather than leave idle.
Aids planning and control (1 mark). It is a target against which actual cash flow can be compared, helping managers control spending and make decisions about timing.
Supports borrowing (1 mark). A cash budget reassures banks and lenders that the firm has planned its finances, making it easier to obtain a loan or overdraft.
SQA Higher style6 marksA cash budget shows a forecast cash shortage in three months' time. Describe actions the business could take to improve its cash flow.Show worked answer →
Worth 6 marks. Describe several solutions to a cash shortage, one mark each.
Arrange an overdraft or loan (1 mark). Agree short-term borrowing to cover the shortfall.
Reduce or delay payments (1 mark). Negotiate longer credit terms with suppliers, or delay non-essential spending.
Speed up receipts (1 mark). Encourage customers to pay sooner, offer discounts for prompt payment, or reduce the credit given to customers.
Sell off assets (1 mark). Sell unused or surplus assets to raise cash, or use sale and leaseback.
Reduce stock (1 mark). Cut stock levels so less cash is tied up in inventory.
Cut costs or reduce drawings (1 mark). Reduce expenses or the amount owners take out, keeping more cash in the business.
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Sources & how we know this
- Higher Business Management Course Specification — SQA (2026)
- Higher Business Management Course Code C810 76 — SQA (2026)