Cash Budget / Cash Flow Method
Relevent for JAIIB PPB | CAIIB ABM | CCP Module C
Why It Matters in Branch:
For seasonal industries and construction companies, Cash Budget is the only appropriate working capital assessment method. Getting it wrong creates either under-financing or fund diversion.
SHORT NOTES
WHAT IS THE CASH BUDGET METHOD?
Also called the Cash Flow Method or Statement of Cash Flows Method.
Used for businesses where cash flows are seasonal, irregular, or project-specific.
WHEN IS IT USED?
- Seasonal industries: Sugar mills, agricultural processing, fertiliser companies
- Construction companies and contractors
- Film production companies
- Shipping companies
- Any business with erratic cash flow patterns
WHY NOT MPBF FOR THESE?
MPBF assumes a continuous business cycle. For sugar mills, most operations happen in 4-5 months. Using MPBF would either over-estimate or under-estimate requirements.
HOW IT WORKS:
1. Borrower prepares a monthly Cash Budget for 12 months
2. Shows: Month-wise receipts (sales collections, advances) and payments (raw material, wages, overhead)
3. Bank determines peak deficit month — that is the maximum credit requirement
4. Bank sanctions a CC limit equal to the peak deficit
STRUCTURE OF CASH BUDGET:
Month | Opening Balance | Receipts | Payments | Net Cash | Bank Finance Required
BANK’S ROLE:
- Review the cash budget critically — are revenue and expense assumptions realistic?
- Compare with previous year’s actuals
- Monitor monthly — release funds only as per budget
- Reduce limits in surplus months
KEY ADVANTAGE over MPBF:
Funds flow to the borrower exactly when needed — avoids idle funds in account and reduces interest burden for borrower.
QUARTERLY INFORMATION SYSTEM (QIS):
For larger borrowers, RBI mandates submission of quarterly financial statements (QIS Forms) — Form I (estimated & actual figures), Form II (operating statement), Form III (balance sheet data). Banks review these quarterly to monitor working capital behaviour.
BRANCH CONTEXT
✦ Take the example of CC limit of a Sugar Mill. The limit is heavily utilised from October to March (crushing season) and nearly zero from April to September. Under MPBF, we would sanction a year-round limit that sits idle for 6 months. Cash Budget correctly identifies that peak requirement and structures limits seasonally.
