Profit is one thing, cash is another
Many small businesses in Saudi Arabia do not get into trouble because they are making losses, but because cash ran out at a bad time. Credit sales to contractors and large entities, inventory bought in large quantities to get a discount, a loan installment, and statutory obligations falling due in the same month can all leave the bank account empty even though the income statement shows a profit.
The cash budget is a table that forecasts receipts and payments month by month and calculates the expected balance at the end of each month. Its purpose is not to measure profit but to answer a practical question: will we have enough cash every month? And if not, how much do we need, and when?
Components of the table
- Opening balance: cash on hand and at banks at the start of the month.
- Receipts: cash sales, collections from customers based on their actual aging rather than contract terms, and any loan or capital increase.
- Payments: payments to suppliers, salaries, rent, electricity, loan installments, asset purchases, VAT due, and Zakat or income tax.
- Minimum balance: an amount set by management as a safety margin that the balance must not fall below, such as one month's salaries.
- Financing required or repayment: the difference needed to reach the minimum, or the surplus available to repay financing.
Watch the statutory deadlines
One of the most common causes of cash surprises is forgetting statutory obligations. For a business whose financial year ends on 31 December, the Zakat return must be filed and Zakat paid within 120 days of year-end, that is, around the end of April. And if the business files its VAT return quarterly, VAT for the first quarter (January to March) is also due by the end of April. The result is that April may carry two large payments in a single month.
Example: an auto parts store
An auto parts store in Dammam has a balance of 50,000 SAR at the start of March. Management has set a minimum balance of 20,000 SAR. In April, VAT for the first quarter of 18,000 SAR and Zakat of 25,000 SAR fall due.
| Item (SAR) | March | April | May |
|---|---|---|---|
| Opening balance | 50,000 | 30,000 | 20,000 |
| + Receipts | 180,000 | 150,000 | 250,000 |
| − Operating payments | 200,000 | 167,000 | 190,000 |
| − VAT | 0 | 18,000 | 0 |
| − Zakat | 0 | 25,000 | 0 |
| Net cash flow | (20,000) | (60,000) | 60,000 |
| Balance before financing | 30,000 | (30,000) | 80,000 |
| Financing required / (repayment) | 0 | 50,000 | (50,000) |
| Closing balance | 30,000 | 20,000 | 30,000 |
Without the budget, the store would have discovered in mid-April that its account was 30,000 SAR overdrawn. With the budget, it knows from February that it needs 50,000 SAR for one month: 30,000 to cover the deficit and 20,000 to maintain the minimum. It also knows that May will allow full repayment.
How do you estimate collections realistically?
The biggest source of error in a cash budget is assuming that customers will pay on the due date. Go back to the data for the past six months and calculate the actual pattern: what percentage of a month's sales is collected in the same month, how much in the following month, how much after two months, and how much is never collected. If you find, for example, that 40% is collected immediately, 35% in the following month, 20% after two months, and 5% is delayed longer, use these percentages, not the written contract terms.
The same applies to payments: some suppliers accept delays, while others stop supplying at the first delay. Classify suppliers by their flexibility; this helps you know which payments can be moved when needed.
What do you do when you discover an expected deficit?
- Speed up collections: follow up with late-paying customers before the critical month, and offer a small early-payment discount if it costs less than financing.
- Reschedule purchases: postpone non-urgent orders, or agree with the supplier on a longer payment term for this payment.
- Postpone capital expenditure: buying a delivery vehicle or renovating the store can be moved by a month or two.
- Arrange financing early: a bank responds more positively to someone who requests a facility two months before they need it, with a cash budget in hand, than to someone who requests it on the day of the deficit.
- Update the table weekly in critical months, and replace forecast figures with actuals as soon as they occur.