Preparing Cash Budget

From Financial Literacy Wiki

It is important that you prepare a cash budget. This is to ensure that you do not encounter any cashflow problems. So how do we build a cash budget? Below is the three-step process to build a cash budget.

Step 1: Estimating Income

Estimate the various sources of future income on a monthly basis such as take-home pay (Gross income less CPF contributions), bonuses, commissions, pension income, annuity income, interest income, dividends, rental income and proceeds from sale of securities such as stocks, bonds or unit trusts

Step 2: Estimate Expenditures

After estimating the your monthly income, the next step is to estimate your monthly expenditures. This requires you to forecast your needs and then calculate the expenditure needed to satisfy them. During this step, it is helpful to use your previous year's actual expenditure as a basis of forecasts. Next, you factor in all the expenditures that you require to achieve your short-term goals.

Step 3: Determining your cash surplus (deficit)

Based on the Income and Expenditure forecasted, you can then determine your net monthly and annual cash position. During the exercise, if you encounter monthly deficits, some remedial actions you can take include:

• Transfer expenditures in deficit months to surplus months
• Transfer income in surplus months to deficit months
• Eliminate low priority expenditure items
• Increase income
• Draw on Savings or borrow

However if you encounter annual deficit, you might then want to go through your list of expenditure and see which one you can do without. If doing so will reduce your living standard significantly, you might then think of increasing your income. Borrowing should always be the last resort.