Turning a manufacturer's sales budget into cash
How a manufacturer turns its sales and production budgets into a cash budget showing when money really comes in and goes out, month by month.
By Achekam · · 5 min read · For Manufacturing businesses in South Africa, Nigeria, Kenya
Most manufacturers prepare a sales budget, even if it is only a spreadsheet with a row per product and a column per month. Many go on to a production budget that says how much must be made, and from that, what materials and labour will be needed. Fewer take the last step and ask the question the bank manager will ask: in which month will the money actually be there?
That last step is the cash budget. It takes the same plans and moves every figure to the month in which cash changes hands. For a factory, where materials are bought and wages paid long before dealers settle their accounts, the result often looks very different from the profit forecast. This article walks through how to build one and how your own books help you keep it honest.
Why profit and cash part ways
ACCA explains that a company needs a cash budget to make sure it has enough cash to reach the operating levels set in its other budgets. The sales budget may promise a record year, and the production budget may show the factory running flat out to meet it, but neither says whether there will be cash to pay for the steel in the meantime.
ACCA also warns that a healthy profit does not necessarily mean a healthy cash flow, because labour, materials and overheads may have to be paid before the cash from sales arrives. A manufacturer growing quickly feels this most: each extra month of strong orders pulls more cash into materials and wages, and the dealers' payments trail behind.
Receipts: from sales to money in the bank
ACCA explains that sales revenue does not necessarily equal cash inflow. A cash budget converts the sales budget into receipts, using the agreed payment terms and an allowance for customers who never pay.
In practice, for each month's sales:
- Split them between cash or upfront sales and sales on account.
- For sales on account, apply your actual terms. Achekam's invoices default to 30 days, but your dealer agreements may say otherwise, and what dealers actually do may differ again.
- Spread each month's credit sales into the months in which you expect payment.
- Deduct an allowance for customers who will never pay.
- Add the VAT you will collect, if you are registered, because it arrives with the payment even though it is not yours to keep.
Testing the assumptions against your debtors
The weak point in most cash budgets is step 3, because it is a guess about other people's behaviour. Your own receivables are the best evidence you have. In Achekam, issuing an invoice posts it to the ledger as debtors, sales and output VAT, and the receivables are aged into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. If the aged list shows that a large share of what dealers owe sits in the older columns, budgeting for payment within terms is optimistic. Use what the list shows, not what the agreements say.
Payments: before the sale is paid
On the other side, every cost in the production and overhead budgets must be moved to the month it will be paid:
- Materials are paid according to your suppliers' terms, which usually means before the goods made from them are sold, let alone paid for.
- Labour is paid in the month it is worked, or soon after, along with the payroll taxes and contributions that go with it.
- Overheads fall when the bills fall due: some monthly, some quarterly, some once a year, such as insurance or licences.
- VAT and income tax are paid on the dates the tax authority sets.
Labour cost by department shows how to read the payroll figures that feed this line.
Depreciation out, asset purchases in
ACCA explains that depreciation is a non-cash book adjustment and must be left out of a cash budget; cash flows arise only when non-current assets are bought or sold. This is one of the most common errors in home-made cash budgets. The new press appears as a large payment in the month you pay the supplier or the deposit, and then as finance repayments if it is financed, not as a monthly depreciation charge.
What the budget tells you
ACCA explains that a cash budget shows directors in advance when a deficit will need financing and when a surplus could be invested, and that it can guide the timing of asset purchases. For a manufacturer, that usually means three decisions:
| What the budget shows | What to do |
|---|---|
| A deficit months ahead | Talk to the bank now, while you have a plan to show, not when the account is overdrawn |
| A surplus | Decide whether to repay borrowing, hold a reserve or invest it |
| A tight month when a machine purchase is planned | Move the purchase, or arrange finance before it falls due |
Keeping it honest with your own books
A cash budget is only useful if you compare it with what happened. In Achekam, a business can set a budget per account and period and compare it with actual figures from its ledger. That comparison is of income and expenses, not cash, so use it to check whether the sales and costs behind your cash budget were right, and then look at the bank balance and aged debtors to see whether the timing was right.
Each month, compare actual receipts with budgeted receipts. If receipts fall short while sales are on budget, dealers are paying more slowly than you assumed; update the spreading in step 3. For a shorter-range view that is updated every week, see a rolling 13-week cash forecast. If slow payment comes from how dealer accounts are set up, dealer price lists and waybills covers the terms side.
Where to start
ACCA's technical article on cash budgets works through the method with examples. Take next year's sales budget, run your current aged debtors list beside it, and spread the first quarter's sales into the months your dealers actually pay.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
