What is a cash budget, how is it interpreted, and how can a business solve cash flow problems?
The purpose and interpretation of a cash budget (the forecast of cash in and cash out and the closing balance), the causes of cash flow problems, and the solutions a business can use to improve its cash flow.
A focused answer to the SQA National 5 Business Management content on cash budgeting, covering the purpose and interpretation of a cash budget (cash in, cash out, net cash flow and closing balance), the causes of cash flow problems, and the solutions a business can use to improve cash flow.
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What this dot point is asking
The SQA wants you to understand and interpret a cash budget (a forecast of cash coming in and going out), spot when there is a cash flow problem, and describe solutions to improve cash flow. Cash flow is about the timing of money, not the same as profit, so keep the two ideas separate.
What a cash budget is and why it matters
A cash budget (or cash flow forecast) sets out, month by month, the cash a business expects to receive and pay out, and the running balance of cash it will hold. It is a planning tool that lets a business see in advance when cash might run short, so it can arrange finance before a crisis, and when it has spare cash to invest. Without one, a firm can run out of cash unexpectedly even while trading well.
Interpreting a cash budget
A cash budget is read column by column (month by month) using two calculations.
A positive closing balance means the business has cash in hand; a negative closing balance means it has run out of cash and needs to act.
Causes of cash flow problems
A cash flow problem arises when more cash leaves the business than comes in, leaving it short. Common causes include: customers paying late or buying on credit; holding too much stock that ties up cash; overspending on equipment or expansion; low sales or a seasonal dip; large one-off payments such as a tax bill; and paying suppliers too quickly while customers pay slowly.
Solutions to cash flow problems
A business can improve its cash flow in several ways:
- Arrange an overdraft or short-term loan to cover the gap while cash is tight.
- Get customers to pay faster, for example by offering a discount for prompt payment or tightening credit terms.
- Negotiate longer credit with suppliers, so the business pays out later and keeps cash longer.
- Cut or delay spending, for example postponing the purchase of equipment.
- Reduce stock levels, so less cash is tied up in inventory.
- Sell off unused assets to bring in cash.
The best solution matches the cause: a late-paying customer problem suits chasing payments, while a one-off shortage suits an overdraft.
Try this
Q1. State what is meant by the closing balance in a cash budget. [1 mark]
- Cue. The cash left at the end of the month: opening balance plus net cash flow.
Q2. A month has opening balance , receipts and payments . Calculate the closing balance. [2 marks]
- Cue. Net cash flow ; closing balance .
Q3. Describe one way a business could improve its cash flow. [2 marks]
- Cue. Any one of: arrange an overdraft, get customers to pay faster, negotiate longer supplier credit, cut or delay spending, reduce stock, sell assets.
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-style Calculate3 marksIn a month a business has an opening balance of , total receipts of and total payments of . Calculate the net cash flow and the closing balance for the month.Show worked answer →
Award marks for the net cash flow and the closing balance. Net cash flow total receipts total payments , a net outflow (1). Closing balance opening balance net cash flow (1). A further mark is available for interpreting the figures: the business spent more than it received this month but still has a positive closing balance of to carry forward (1). Markers reward the correct net cash flow, the closing balance, and a sensible comment.
SQA-style Describe4 marksDescribe solutions a business could use to solve a cash flow problem.Show worked answer →
Award 1 mark per solution correctly described, up to 4. The business could arrange a bank overdraft or short-term loan to cover the shortage of cash (1). It could ask customers to pay more quickly, for example by offering a discount for prompt payment, to bring cash in sooner (1). It could negotiate longer credit with suppliers so it pays out later and keeps cash longer (1). It could cut or delay spending, for example postponing the purchase of equipment, or sell off unwanted assets to raise cash (1). Markers reward described solutions that would genuinely improve cash flow.
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Sources & how we know this
- National 5 Business Management Course Specification — SQA (2024)