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The preparation of cash budget (a per receipt and payments method) require forecast of different receipt and disbursement by the firm during each of the interim period.

1)    Payments for material etc.

The amount & timing of the payment for raw material or for finished goods during given period is closely to the sales volume of the firm. However, this relationship is not necessarily precise. It may be upset by a decision to increase or decrease the size of any or  all items of inventories of raw material, work-in-progress or of finished goods. Obviously, an increase in inventories would require purchases in excess of those required to support estimated sales. A decision to decrease inventories would lower the volume the volume of purchases needed. Also, a decision to produce highly seasonal goods at a constant rate through out the year would require regular payments, though the goods would be sold only during the season. Therefore, while the volume of sales will determine the basic purchase requirements, the production schedule and the inventory will influence the timings & quantity of goods purchased. This in turn, will affect the cash out-flows on account of payments for these purchases.

2.Payments for operating expenses:

The cash disbursement for operating expenses may be listed in cash budget under the heading of manufacturing, selling and administrative expenses. These expenses categories may be classified as fixed expenses, variable expenses or semi-variable expenses, for purpose of  forecasting the timings and magnitude of  cash outflows. 

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