Under the receipt and payments method of preparation of cash budget , first of all, the cash budget period is selected. A financial year is no doubt the over all period within which smaller interim periods, say a week or a month or a quarter is selected. Now , detailed cash inflows and outflows for each interim period are noted down. Beginning with the opening cash balance, the expected cash inflows during each period are added to it & from the total, the expected outflows for that period are deducted to find out the cash balance at the end of that period. This closing cash balance becomes the opening cash balance for the next period and so on.

All types of expected cash inflows & outflows i.e., transaction cash flows , precautionary cash flows and speculative cash flows are incorporated because all these affect the cash balance required during particular period and moreover the cash flows are consistently changing from one period to another. The interaction between these cash flows results in a need to identify the minimum cash balance i.e., desired at any point of time.

While preparing the cash budget , this desired minimum cash balance is considered at the end of each of the cash budget period.

It may be noted that the preparation of cash budget ( as per receipt & payments method ) require forecast of different receipt and disbursement by the firm during each of the interim period.