How do you prepare a cash budget showing receipts, payments and the running bank balance, and how is it used to manage liquidity?
Preparing a cash budget showing forecast receipts and payments each month, the net cash flow, and the opening and closing bank balances, and interpreting it to manage cash flow.
A focused answer to the SQA National 5 Accounting content on cash budgets, covering how to forecast monthly receipts and payments, calculate the net cash flow, carry the closing bank balance forward to the next month, and interpret the budget to spot when the business may need finance.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
The SQA wants you to prepare a cash budget: forecast the receipts and payments for each month, work out the net cash flow, and carry the closing bank balance forward as the next month's opening balance - then interpret it to manage cash flow.
Why a cash budget?
A business can be profitable yet still run out of cash - for example if customers pay slowly while bills fall due. A cash budget looks ahead, usually month by month, to forecast whether the bank balance will stay positive. It lets managers plan finance before a problem hits.
The structure of a cash budget
A cash budget is a table with a column for each month and rows for receipts, payments and balances.
- Receipts - cash sales, money from credit customers (receivables), a loan received, capital introduced, or the sale of a non-current asset.
- Payments - cash purchases, money paid to suppliers, wages, rent, expenses, the purchase of a non-current asset, drawings, and loan repayments.
Interpreting the cash budget
The most important line is the closing balance. A positive balance means the business can meet its payments; a negative balance means it will be overdrawn and short of cash. A budget that dips negative in one month warns the manager to act in advance.
Examples in context
A shop expects strong sales in December but must pay suppliers in November to stock up. A cash budget shows the November balance turning negative, so the owner arranges an overdraft in advance rather than being caught short. Because the budget separates cash timing from profit, it reveals liquidity problems a profit figure would hide - the exact insight this dot point tests.
Try this
Q1. Receipts , payments . Find the net cash flow. [1 mark]
- Cue. .
Q2. Opening balance , net cash flow . Find the closing balance. [1 mark]
- Cue. .
Q3. Give one action for a business forecasting a negative closing balance. [1 mark]
- Cue. Arrange an overdraft (or delay payments, or chase receipts).
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 N5 style5 marksA business starts March with a bank balance of 2000 pounds. In March, receipts are 9000 pounds and payments are 11000 pounds. In April, receipts are 12000 pounds and payments are 8000 pounds. Calculate the closing bank balance at the end of March and at the end of April.Show worked answer →
March: net cash flow receipts payments (1 mark). Closing balance opening balance net cash flow (1 mark). April opening balance is March's closing balance of (1 mark for carrying it forward). April net cash flow , so April closing balance (1 mark for method, 1 mark for the answer). Markers reward netting receipts and payments, adding to the opening balance, and carrying each closing balance forward as the next month's opening balance.
SQA N5 style3 marksA cash budget shows a forecast closing bank balance of minus 3000 pounds in June. Explain what this means and one action the business could take.Show worked answer →
A negative closing balance of means the business is forecast to run out of cash and be overdrawn by at the end of June - it does not have enough cash to meet its payments (1 mark). One suitable action: arrange a bank overdraft or short-term loan to cover the shortfall (1 mark); or alternatively delay non-essential payments, chase customers to pay sooner, or reduce or reschedule spending such as buying a non-current asset (1 mark for any sensible action). Markers reward explaining the negative balance as a cash shortfall and a realistic action to restore a positive balance.
Related dot points
- Classifying costs by behaviour (fixed, variable, semi-variable), by traceability (direct, indirect) and by element (materials, labour, overheads), and calculating total and unit cost.
A focused answer to the SQA National 5 Accounting content on classifying costs, covering cost behaviour (fixed, variable and semi-variable costs), traceability (direct and indirect costs), the three cost elements (materials, labour and overheads), and how to calculate total cost and cost per unit.
- Costing the three cost elements - materials, labour and overheads - including valuing materials issued, calculating labour cost from rates and hours, sharing overheads, and preparing a cost statement showing prime cost and total cost.
A focused answer to the SQA National 5 Accounting content on costing the three elements, covering valuing materials issued to production, calculating direct labour cost from hours and rates including overtime, sharing overheads across output, and building a cost statement that shows prime cost and total cost.
- Calculating contribution per unit, the break-even point in units and in sales revenue, the margin of safety, and the output required for a target profit, and interpreting a break-even chart.
A focused answer to the SQA National 5 Accounting content on break-even analysis, covering contribution per unit, the break-even point in units and in sales revenue, the margin of safety, the output needed for a target profit, and how to read a break-even chart.
- Using management accounting information (contribution, break-even and cost data) to make decisions such as accepting a special order, and the role of spreadsheets and IT in preparing and presenting accounting information.
A focused answer to the SQA National 5 Accounting content on decision-making and the use of IT, covering how contribution, break-even and cost information support decisions such as a special order or a make-or-buy choice, and the role of spreadsheets and information technology in preparing, presenting and updating accounting information.
- Preparing a statement of financial position (balance sheet) for a sole trader, classifying non-current and current assets, current and non-current liabilities, and presenting the capital section with profit and drawings.
A focused answer to the SQA National 5 Accounting content on the statement of financial position, covering the classification of non-current and current assets, current and non-current liabilities, the calculation of working capital, and the capital section showing opening capital plus profit less drawings.