Currencies have long been part of human civilizations. If you have more currency, then you have more spending power. When you build a history of using that currency wisely, then you are given access to lending tools which can further your spending power.
The only problem is that lending tools can lead to debt. When you have too much debt, then you limit the amount of cash you can use for current spending. That’s because you’re too busy paying off the interest costs of previous purchases.
Non-cash transactions are convenient because you can earn rewards or have access to emergency funds. They can also ruin your budget if too many of them occur.
That’s why using a cash budget is becoming a popular option, for households and businesses alike. Here are the cash budget advantages and disadvantages to consider.
List of the Advantages of a Cash Budget
1. You can avoid debt.
If all you’re allowed to do is spend the cash you have, then you avoid debt. Once you run out of cash, you can no longer spend anything. That does mean you must set aside cash for emergency situations, otherwise you may find yourself in an uncomfortable situation. If your hot water heater goes out and you don’t have enough cash available to replace it, then you’ll be taking cold showers until you do.
2. You are forced to budget better.
A cash-only budget forces households and businesses to budget better. There are no “outs” with this type of budget. You either make ends meet and live comfortably or you don’t and suffer the consequences. It is a process which requires frequent attention to details, tracking specific spending habits, and proactive management to ensure that there is always enough money available to take care of every need.
3. You become more resourceful.
When you’re using a cash budget, you must find efficiencies that you may not seek out if you are using other financial resources and tools. You must find ways to save cash, which means you must eliminate all waste from your budget. Businesses find that when they are watching every penny (or equivalent) that comes in and out with their cash flow, they can control spending better and find new ways of growth. You get to see where all your cash is going when you use this type of budget.
4. You stay in-touch with reality.
People don’t look at their bills because it makes them feel like they don’t need to pay it. With a cash budget approach, you’re given a heavy dose of reality. You must look at your financial statements, your bills, your obligations, and every expenditure that you make. There is no other way to determine if you’re overspending on purchases. Because your supply of cash is limited, overspending limits your resource access. You’re forced out of the position of being able to purchase something which you may not be able to afford at the moment.
5. You can quickly identify potential deficits.
When you are operating off of a cash budget, then you can quickly determine if you’ll have enough cash to meet obligations. If not, then you’ll be able to trigger a corrective action to ensure the budget estimates can be met. Being cash-only does not limit the ability to borrow money from a business perspective. It’s better to borrow to pay taxes or meet a monthly payroll, especially if the cash shortfall is a temporary issue.
6. You are able to communicate your financial position.
When a cash budget is being used, it is much easier to communicate the current state of your financial health. Anyone who has an interest in the budget can look at cash inflows and outflows to determine current and future issues which may need to be addressed. Declining cash levels show an inability to pay existing debt, indicating a potential future bankruptcy. Rising cash levels may indicate strong demand or good household money management.
List of the Disadvantages of a Cash Budget
1. It creates a danger of theft.
You must have plenty of documentation that tracks your cash movements to protect yourself against theft. Cash is the easiest asset to steal, partially because it is not very easy to trace. Although you don’t need to list every serial number of every bill you send outside of your home or business, it is helpful to sign-out specific amounts when the cash must travel to a new location. That will give you a paper trail that can be used to potentially make an insurance claim should something happen.
2. It limits your spending power.
Many businesses today have stopped accepting cash for certain activities. You may find it to be impossible to rent a car without having at least a debit card available to access your cash resources. Some hotels will not accept a reservation without a debit or credit card number. If you switch to a cash-only budget, you may find it difficult to access some of the services your home or business may require. That, in turn, limits your overall productivity.
3. It limits where you spend your money.
If you show up at a store to purchase something in cash, most will accept the transaction without a second thought. If you want to make that purchase online, however, cash is not going to be a suitable option. Most, but not all, geographic locations have eliminated the cash on-delivery (COD) process, requiring payment up-front for products or services. Trying to process a cash payment on an e-commerce website is almost impossible to do.
4. It can be easy to lose.
If you carry cash on you, there is a chance you could inadvertently misplace it. That means you no longer have access to it until it is found. That is why having some level of card protection, even if it is a debit card, offers a small advantage. If you lose your debit card, you can call your bank and have the number frozen until the card is found, or the institution sends you a new one. Lose your cash and you’ve lost your money.
5. It limits your ability to build a credit profile.
Cash budgets may limit the amount of debt that you create for yourself. That is advantageous in saving money. It also means that your ability to purchase big ticket items will be restricted. You’ll need to save up enough money to purchase a vehicle instead of financing the transaction. You’d be forced to save up the cash to purchase a property or home outright instead of being able to use a mortgage. In the long run, you pay less with cash because you avoid interest. In the short-term, however, you are limiting your options.
6. It eliminates rewards.
Credit card rewards might seem like a trap to some. When used wisely, they can extend the power of your finances. Imagine if your credit card gives you a 3% cash back reward on purchases you already make. Pay with the credit card, earn the cash back, then pay off the balance each month with the cash you’d have spent anyway. Just like that, you’ve increased your spending power by 3%. If you use a cash-only budget, this benefit is not accessible.
7. It is not always a reflection of profit.
Within a cash budget, it is easy to mistake an inflow of cash as profit. That is not always the case. Inflows might occur because of a security deposit being paid. The sale of a capital asset creates a cash inflow as well. One-off activities and non-sustainable events create cash inflows as well. If these are mistakenly classified as profits, then the estimates being made on actual profits are flawed and may create unpleasant surprises down the road.
8. It relies on estimates to meet future needs.
When using a cash budget, the inflows and outflows from the previous year are used to allocate cash for line items in the next year. That means each annual budget is an estimate, based on the previous results generated. There is no guarantee that cash flows will be similar year-by-year for any budget. At the same time, non-financial issues may influence your cash flow, which may negate certain values that may generate cash in the future.
9. It forces cost to be the primary factor in making decisions.
Let’s say there is a product priced at $2.50 and you like to purchase it at this store across town because the customer service is better. You could purchase it for $2 at a closer store, but the service there is terrible. Using a cash budget, you’re forced to go with the latter because that is where you save money. Cost becomes a primary factor in making each decision.
These cash budget advantages and disadvantages are good to consider if you’re struggling with debt right now. Spending with cash limits new debt, though it also limits certain opportunities. It creates discipline within personal spending habits, encouraging an exploration for new efficiencies. It may not be the best approach for everyone, especially businesses seeking immediate growth, but the advantages always make it worth a second look.