When the profit budgets are complete, it is important that a cash budget is prepared.
This is a Cash-Flow Forecast. (click to understand this)
In practice, the profit budget and cash budget are linked.
- The profit budget cannot be completed until the interest figure is available.
- This in turn depends on the cash budget.
- The cash budget depends partly on the profit budget.
- Dilemmas like this are quite common in budgeting.
This can be very time-consuming and budgeting is much simpler if it is computerized.
Several hours' work can be reduced to minutes and management is much freer to test budgets with useful "what if" questions.
Forecast Balance Sheet
Accounting rules stated that every debit has a credit.
It follows that every figure in the budgets has a forecast consequence in a future Balance Sheet.
It is normal to conclude the budgets by preparing a month-by-month forecast Balance Sheet and bankers are likely to ask for this.
It may be that some aspect of the Balance Sheet is unacceptable and a partial re-budget is necessary.
In practice, top management is likely to review and alter some aspects of the budgets several times.