At its most basic level, a cash budget is a detailed plan that shows all expected sources and uses of cash. This is a budgeting tool regularly used by small businesses to monitor their cash inflows and outflows.
Cash budgets usually have the following main components: a beginning cash balance, cash collections, and cash disbursements. The net total of these three components will result in a cash surplus or deficit, and this leads into the ending cash balance.
Cash budgets can also be used in personal finance to determine where your money is being spent. The advantages of a cash budget are easy control over your finances, the ability to save, being able to plan ahead, and ease of budgeting
Control over finances
Cash budgets are simple – you withdraw a set amount of cash for a given period of time, and this is used to cover your expenses. This simplicity is the main strength of cash budgets over credit budgets because you have physical control over your finances. When the cash is gone, you have to make do until the beginning of the next month. This helps you to control your spending and to keep within your budget. You are able to effectively limit your monthly spend with a cash budget.
Cash is the perfect feedback mechanism. Every time you use cash to buy an item, the physical act of handing that cash over is a visceral experience that will indirectly motivate you to spend less money. Using a pure cash budget recalibrates your relationship with money, making it real instead of an amorphous connection via plastic credit or debit cards.
Cash is a lead measure. Using a cash budget allows you to see at a glance, how much money you have left to use for the rest of the month. This lets you plan ahead and keep within set spending limits. For example, on the last week of the month, you may only have $20 left in your wallet until the next designated withdrawal. Knowing that you have limited funds will compel you to plan ahead on what you will need to spend that money on, be it food, transport or other essentials.
Ease of budgeting
For many people, budgeting involves tedious hours of noting down every expense, tallying credit card statements, reconciling bank bills, collecting receipts and check stubs. With a cash budget, the monthly budgeting process is distilled to simply tallying up the cash leftover at the end of the month, and noting down where or what you’ve spent the cash on.