5.4: The Cash Budget and Other Specialized Budgets
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- 112064
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- Explain the value of the cash budget in clarifying risks and opportunities.
- Explain the purpose of a specialized budget, including a tax budget.
- Demonstrate the importance of including specialized budgets in the comprehensive budget.
The Cash Budget
When cash flows are not periodic, meaning they are influenced by seasonality or a frequency different from the budgetary period, a closer examination of cash flow management can be beneficial. Although cash flows may be sufficient to cover expenses for the entire year, there may still be timing differences. For example, cash flows from income may be less frequent than cash flows for expenses. Cash flows may be seasonal, whereas expenses tend to be more regular. Most expenses must be paid monthly, and if some income cash flows occur less frequently or only seasonally, there is a risk of running out of cash in a particular month. For cash flows, timing is everything.
A good management tool is the cash budget, which is a detailed breakdown of budget items by month. Irregular cash flows can be allocated to specific months when they are expected to occur, allowing you to see the effects of cash flow timing more clearly. Mark's cash budget for 2024 is in the spreadsheet shown in Table 5.4.1 .
| 2024 January |
2024 February |
2024 March |
2024 April |
2024 May |
2024 June |
2024 July |
2024 August |
2024 September |
2024 October |
2024 November |
2024 December |
|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Incomes | ||||||||||||
| Wages | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 |
| Tutoring | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
| Memorabilia Sales | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 |
| House Painting | $ 3,472 | $ 3,472 | $ 3,472 | |||||||||
| Interest Income | $ 4 | $ 25 | $ 36 | $ 45 | $ 57 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
| Total Income | $ 4,118 | $ 3,271 | $ 3,281 | $ 3,291 | $ 3,303 | $ 6,718 | $ 6,718 | $ 6,718 | $ 3,246 | $ 3,246 | $ 3,246 | $ 3,246 |
| Payroll/Income Taxes | $ 792 | $ 792 | $ 792 | $ 792 | $ 792 | $ 792 | $ 792 | $ 792 | $ 792 | $ 792 | $ 792 | $ 792 |
| Disposable Income | $ 4,910 | $ 4,062 | $ 4,073 | $ 4,083 | $ 4,094 | $ 7,510 | $ 7,510 | $ 7,510 | $ 4,038 | $ 4,038 | $ 4,038 | $ 4,038 |
| Living Expenses | ||||||||||||
| Groceries | $ 260 | $ 260 | $ 260 | $ 260 | $ 260 | $ 260 | $ 260 | $ 260 | $ 260 | $ 260 | $ 260 | $ 260 |
| Car-Fuel | $ 156 | $ 156 | $ 156 | $ 156 | $ 156 | $ 156 | $ 156 | $ 156 | $ 156 | $ 156 | $ 156 | $ 156 |
| Car-Services, etc. | $ 29 | $ 29 | $ 29 | $ 29 | $ 29 | $ 29 | $ 29 | $ 29 | $ 29 | $ 29 | $ 29 | $ 29 |
| Car-Insurance | -$ 400 | -$ 400 | ||||||||||
| Electricity | $ 65 | $ 65 | $ 65 | $ 65 | $ 65 | $ 65 | $ 65 | $ 65 | $ 65 | $ 65 | $ 65 | $ 65 |
| Phone/Cable/Internet | $ 89 | $ 89 | $ 89 | $ 89 | $ 89 | $ 89 | $ 89 | $ 89 | $ 89 | $ 89 | $ 89 | $ 89 |
| Heat | $ 100 | $ 100 | $ 100 | $ 100 | $ 100 | $ 100 | $ 100 | $ 100 | $ 100 | $ 100 | $ 100 | $ 100 |
| Health Insurance | $ 63 | $ 63 | $ 63 | $ 63 | $ 63 | $ 63 | $ 63 | $ 63 | $ 63 | $ 63 | $ 63 | $ 63 |
| Medical | $ 4 | $ 4 | $ 4 | $ 4 | $ 4 | $ 4 | $ 4 | $ 4 | $ 4 | $ 4 | $ 4 | $ 4 |
| Dental | $ 42 | $ 42 | $ 42 | $ 42 | $ 42 | $ 42 | $ 42 | $ 42 | $ 42 | $ 42 | $ 42 | $ 42 |
| Travel/Entertainment | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 | $ 250 |
| Car Loan Payment | $ 499 | $ 499 | $ 499 | $ 499 | $ 499 | $ 499 | $ 499 | $ 499 | $ 499 | $ 499 | $ 499 | $ 499 |
| Mortgage Interest | $ 897 | $ 897 | $ 897 | $ 897 | $ 897 | $ 897 | $ 897 | $ 897 | $ 897 | $ 897 | $ 897 | $ 897 |
| Property Tax | -$ 4,350 | |||||||||||
| Total Living Expenses | $ 2,455 | $ 2,055 | $ 2,455 | $ 2,455 | $ 2,455 | $ 2,455 | $ 2,455 | $ 2,055 | $ 2,455 | -$ 1,895 | $ 2,455 | $ 2,455 |
| Income after Living Expenses | $ 7,365 | $ 6,117 | $ 6,528 | $ 6,538 | $ 6,549 | $ 9,965 | $ 9,965 | $ 9,565 | $ 6,493 | $ 2,143 | $ 6,493 | $ 6,493 |
| Interest Expense | -$ 49 | -$ 27 | -$ 7 | -$ 9 | -$ 40 | -$ 43 | -$ 46 | |||||
| Capital Expenditures/Investment | ||||||||||||
| Mortgage Principal | $ 270 | $ 270 | $ 270 | $ 270 | $ 270 | $ 270 | $ 270 | $ 270 | $ 270 | $ 270 | $ 270 | $ 270 |
| Free Cash Flow | $ 7,634 | $ 6,387 | $ 5,798 | $ 6,808 | $ 6,819 | $ 10,186 | $ 10,208 | $ 9,827 | $ 6,754 | $ 2,372 | $ 6,719 | $ 6,716 |
| IRA Deposit | -$ 1,000 | |||||||||||
| Retirement Account Deposit | -$ 15,000 | |||||||||||
| Home Improvement | $ 7,634 | $ 6,387 | $ 5,798 | $ 6,808 | -$ 34,126 | |||||||
| Savings Deposit (withdrawal) | $ 10,525 | -$ 3,250 | -$ 3,275 | -$ 2,890 | $ 180 | $ 4,765 | $ 415 | $ 417 | ||||
| Draw on (pay off) Line of Credit | ||||||||||||
| Net Cash Flow | $ 0 | $ 0 | $ 0 | $ 0 | $ 36,470 | $ 6,936 | $ 6,933 | $ 6,937 | $ 6,934 | $ 7,137 | $ 7,134 | $ 7,133 |
| Line of Credit | $ 27,216 | $ 10,525 | $ 7,275 | $ 4,000 | $ 1,110 | $ 1,290 | $ 6,055 | $ 6,470 | $ 6,887 | |||
| Money Market Account Balance | $ 14,971 | $ 21,383 | $ 34,069 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
Mark's original annual budget (Table 5.4.1 ) indicates that although his income is sufficient to cover his living expenses, it does not generate enough cash to support his capital expenditures, specifically, to repair the roof. His cash flow would fall short by about $6,870, even after he uses the cash from his savings (the money market account). If he must make the capital expenditure this year, he can finance it with a line of credit—a loan where money can be borrowed as needed, up to a limit, and repaid as desired, with interest paid only on the outstanding balance. Using the line of credit, Mark would create an extra $321 of interest expense for the year.
The alternative cash budget (Table 5.4.2 ) shows a more detailed and slightly different story. Because of Mark's seasonal income, if he has the roof fixed in May, he will need to borrow $10,525 in May (before he has income from painting). Then he can pay that balance down until October, when he will need to extend it again to pay his property tax. By the end of the year, his outstanding debt will be slightly more than initially shown, with an ending balance of $6,887. However, his total interest expense will be slightly lower - only $221 - as the loan balance (and therefore the interest expense) will be lower in some of the months he has the loan.
The cash (monthly) budget shows a different story than the annual budget because of the seasonal nature of Mark's income. Since he plans to make capital expenditures before earning income from painting, he has to borrow more—and assume more risk—than indicated initially.
The cash budget may reveal risks, but it also highlights remedies that may not be immediately apparent. In Mark's case, it is clear that the capital expenditure cannot be financed without some external source of capital, most likely a line of credit. He would have to pay interest on that loan, creating an additional expense. That expense would be proportional to the amount borrowed and the duration for which it is borrowed. In his original plan, the capital expenditure was scheduled for May, and Mark would have had to borrow approximately $10,525, paying interest for the next seven months of the year. However, delaying the capital expenditure until October would cost him less, because he would have to borrow less and would be paying interest for fewer months. An alternative cash budget illustrating this scenario is shown in Table 5.4.2 .
| 2024 January |
2024 February |
2024 March |
2024 April |
2024 May |
2024 June |
2024 July |
2024 August |
2024 September |
2024 October |
2024 November |
2024 December |
|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Incomes | ||||||||||||
| Wages | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 | $ 3,167 |
| Tutoring | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 |
| Memorabilia Sales | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 | $ 79 |
| House Painting | $ 3,472 | $ 3,472 | $ 3,472 | |||||||||
| Interest Income | $ 12 | $ 12 | $ 10 | $ 8 | $ 8 | $ 8 | $ 13 | $ 19 | $ 24 | $ 0 | $ 0 | $ 0 |
| Total Income | $ 3,258 | $ 3,257 | $ 3,256 | $ 3,254 | $ 3,254 | $ 6,726 | $ 6,731 | $ 6,737 | $ 3,269 | $ 3,246 | $ 3,246 | $ 3,246 |
| Payroll/Income Taxes | -$ 792 | -$ 792 | -$ 792 | -$ 792 | -$ 792 | -$ 792 | -$ 792 | -$ 792 | -$ 792 | -$ 792 | -$ 792 | -$ 792 |
| Disposable Income | $ 2,466 | $ 2,466 | $ 2,465 | $ 2,462 | $ 2,462 | $ 5,934 | $ 5,940 | $ 5,945 | $ 2,578 | $ 2,454 | $ 2,454 | $ 2,454 |
| Living Expenses | ||||||||||||
| Groceries | -$ 260 | -$ 260 | -$ 260 | -$ 260 | -$ 260 | -$ 260 | -$ 260 | -$ 260 | -$ 260 | -$ 260 | -$ 260 | -$ 260 |
| Car-Fuel | -$ 156 | -$ 156 | -$ 156 | -$ 156 | -$ 156 | -$ 156 | -$ 156 | -$ 156 | -$ 156 | -$ 156 | -$ 156 | -$ 156 |
| Car-Services, etc. | -$ 29 | -$ 29 | -$ 29 | -$ 29 | -$ 29 | -$ 29 | -$ 29 | -$ 29 | -$ 29 | -$ 29 | -$ 29 | -$ 29 |
| Car-Insurance | -$ 400 | -$ 400 | ||||||||||
| Electricity | -$ 65 | -$ 65 | -$ 65 | -$ 65 | -$ 65 | -$ 65 | -$ 65 | -$ 65 | -$ 65 | -$ 65 | -$ 65 | -$ 65 |
| Phone/Cable/Internet | -$ 89 | -$ 89 | -$ 89 | -$ 89 | -$ 89 | -$ 89 | -$ 89 | -$ 89 | -$ 89 | -$ 89 | -$ 89 | -$ 89 |
| Heat | -$ 200 | -$ 200 | -$ 200 | -$ 200 | -$ 200 | -$ 200 | ||||||
| Health Insurance | -$ 63 | -$ 63 | -$ 63 | -$ 63 | -$ 63 | -$ 63 | -$ 63 | -$ 63 | -$ 63 | -$ 63 | -$ 63 | -$ 63 |
| Medical | -$ 4 | -$ 4 | -$ 4 | -$ 4 | -$ 4 | -$ 4 | -$ 4 | -$ 4 | -$ 4 | -$ 4 | -$ 4 | -$ 4 |
| Dental | -$ 42 | -$ 42 | -$ 42 | -$ 42 | -$ 42 | -$ 42 | -$ 42 | -$ 42 | -$ 42 | -$ 42 | -$ 42 | -$ 42 |
| Travel/Entertainment | -$ 250 | -$ 250 | -$ 250 | -$ 250 | -$ 250 | -$ 250 | -$ 250 | -$ 250 | -$ 250 | -$ 250 | -$ 250 | -$ 250 |
| Car Loan Payment | -$ 499 | -$ 499 | -$ 499 | -$ 499 | -$ 499 | -$ 499 | -$ 499 | -$ 499 | -$ 499 | -$ 499 | -$ 499 | -$ 499 |
| Mortgage Interest | -$ 897 | -$ 897 | -$ 897 | -$ 897 | -$ 897 | -$ 897 | -$ 897 | -$ 897 | -$ 897 | -$ 897 | -$ 897 | -$ 897 |
| Property Tax | -$ 4,350 | |||||||||||
| Total Living Expenses | -$ 2,555 | -$ 2,955 | -$ 2,555 | -$ 2,355 | -$ 2,355 | -$ 2,355 | -$ 2,355 | -$ 2,755 | -$ 2,355 | -$ 6,905 | -$ 2,555 | -$ 2,555 |
| Income after Living Expenses | $ 89 | $ 489 | $ 90 | $ 107 | $ 107 | $ 3,579 | $ 3,585 | $ 3,190 | $ 123 | -$ 4,451 | -$ 101 | -$ 101 |
| Interest Expense | $ 0 | $ 0 | $ 0 | $ 0 | -$ 38 | -$ 41 | -$ 44 | |||||
| Capital Expenditures/Investment | ||||||||||||
| Mortgage Principal | -$ 270 | -$ 270 | -$ 270 | -$ 270 | -$ 270 | -$ 270 | -$ 270 | -$ 270 | -$ 270 | -$ 270 | -$ 270 | -$ 270 |
| Free Cash Flow | -$ 358 | -$ 759 | -$ 360 | -$ 162 | -$ 163 | $ 3,309 | $ 3,315 | $ 2,920 | -$ 147 | -$ 4,759 | -$ 412 | -$ 414 |
| IRA Deposit | -$ 1,000 | |||||||||||
| Retirement Account Deposit | -$ 15,000 | |||||||||||
| Home Improvement | -$ 358 | -$ 759 | -$ 1,360 | -$ 162 | -$ 163 | $ 3,309 | $ 3,315 | $ 2,920 | -$ 147 | -$ 14,029 | ||
| Savings Deposit (withdrawal) | $ 5,730 | $ 412 | $ 415 | |||||||||
| Draw on (pay off) Line of Credit | ||||||||||||
| Net Cash Flow | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 1 |
| Line of Credit | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 5,730 | $ 6,142 | $ 6,557 | ||||
| Money Market Account Balance | $ 6,978 | $ 6,230 | $ 4,881 | $ 4,726 | $ 4,571 | $ 7,886 | $ 11,214 | $ 14,153 | $ 14,029 | $ 0 | $ 0 | $ 0 |
Delaying the capital expenditure until October would also allow the money market account to build value, as Mark's seasonal income would be deposited during the summer, which would finance more of the capital expenditure. He could borrow less, ending the year about $6,557 short, and his interest expense would be only $123 because he has borrowed less and because he can wait until October to borrow, thus paying interest for only three months of the year.
Timing matters for cash flows not only because you need to get cash before you spend it, but also because time affects value. It is always better to have liquidity sooner and hang onto it longer. A cash budget provides a much more detailed look at these timing issues, and the risks and opportunities of cash management that you may otherwise have missed.
Other Specialized Budgets
A cash flow budget is a budget that projects a specific aspect of your finances, that is, the cash flows. Other types of specialized budgets focus on a specific financial aspect or goal. A specialized budget is ultimately included in the comprehensive budget, as it is a part of total financial activity. It typically focuses on a specific activity in greater detail, such as the impact of owning and maintaining a particular asset or pursuing a specific activity. You create a budget for that asset or that activity by segregating its income and expenses from your comprehensive budget. It is possible to make such a focused budget only if you can identify and separate its financial activity from the rest of your financial life. If so, you may want to track an activity separately that is directly related to a specific goal.
For example, suppose you decide to take up weekend backpacking as a recreational activity. You will try it for two years and then decide whether to continue. Aside from assessing the enjoyment it gives you, you also want to evaluate its impact on your finances. Typically, weekend backpacking requires specialized equipment and clothing, travel to a hiking trail access or campground, and perhaps lodging and meals: capital investment (in the equipment) and then recurring expenses. You may want to create a separate budget for your backpacking investment and expenses to assess the value of this new recreational activity.
One common type of specialized budget is a tax budget, which includes activities, such as incomes, expenses, gains, and losses, that have direct tax consequences. A tax budget can be useful in planning for or anticipating an event that will have significant tax consequences, such as income from self-employment; the sale of long-term or short-term assets such as a stock, business, or real estate; or a gift of significant wealth or the settling of an estate.
While it can be valuable to isolate and identify the effects of a specific activity or the progress toward a specific goal, that activity or that goal is ultimately just a part of your larger financial picture. Specialized budgets should remain an integral part of your comprehensive financial planning.
- The cash flow budget is an alternative format used as a cash management tool that provides
- more detailed information about the timing and amounts of cash flows
- a clearer view of risks and opportunities
- Specialized budgets focus on a specific asset or activity
- A tax budget is commonly used to track taxable activities
- Eventually, specialized budgets need to be included in the comprehensive budget to have a complete perspective
- When is a cash flow budget a useful alternative to a comprehensive budget?
- Create a specialized budget and a tax budget from your comprehensive budget.