Budgeting in Egyptian Small and Medium Companies: Build and Monitor

Executive summary

• We found nothing in Companies Law 159 of 1981 or its executive regulations requiring a private company to prepare a budget. For each financial year, they require the financial statements and a report on the year just ended (Article 64 of the Law; Articles 187 and 284 of the regulations).
• The board's report of a joint stock company or a partnership limited by shares includes an item on "the future of the business" (Appendix 1 to the regulations); the text does not set its form.
• In assessing going concern, management takes into account the information available about a period of at least twelve months from the end of the reporting period (Egyptian Accounting Standard No. 1, paragraph 26).
• A budget is built in order: sales, then costs, then cash, then capital spending, whose payments go back into the cash budget.
• It is followed monthly after the close, and taxes and social insurance enter the cash budget in the months they are paid (Article 32 of Law 206 of 2020; Article 14 of Law 91 of 2005; Article 71 of the executive regulations of Law 148 of 2019).

What a budget is, and whether any text requires one

A budget is a financial plan for the coming year, spread over its months, approved by management before the year starts and then used to measure what actually happens. It lets management know in advance when a cash shortfall will arise and how large it will be, gives every expense line an approved ceiling, and puts pricing, hiring and purchasing decisions on considered figures.

We found nothing in the Companies Law or its executive regulations requiring a private company to prepare one. Article 64 of Companies Law 159 of 1981, as replaced by Law 3 of 1998, requires the board of a joint stock company to prepare for each financial year "the financial statements of the company and a report on its activity during the financial year and on its financial position at the end of that year", and the rules for joint stock companies apply to partnerships limited by shares save for the articles excepted in Article 110. Under the executive regulations issued by Decree 96 of 1982, the board, or the managing partner or partners, of those two forms prepare at the end of each financial year, among other documents, "a written report on the company's position and activity during the year" (Article 187), and the managers of a limited liability company prepare "a report on the company's business in the financial year just ended" (Article 284). All three texts look at a year that has ended, not at the year ahead.

Appendix 1 to the regulations, to which Article 188 refers, does look ahead: its first item for the board's report is "the general position of the company, the results of operations, and the future of the business", and it ends: "figures are presented in comparison with the figures of the previous year". No form is set for the account of the future, and the comparison required is with the previous year, not with a budget. The word «الميزانية» in the original texts is the balance sheet (modelled in Appendix 4), not a budget; in the Law it has been replaced by "financial statements" (Article 4 of Law 4 of 2018).

Management assesses the entity's ability to continue as a going concern when preparing the financial statements (Egyptian Accounting Standard No. 1, Presentation of Financial Statements, 2019 revision, paragraph 25), taking into account "all available information about the foreseeable future, which is a period of at least twelve months from the end of the reporting period", and in other cases it may need to consider "a range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing" (paragraph 26). The standard does not mention a budget; in our view a cash budget is among the clearest support for that assessment, though not all of it.

Building the budget: from sales to capital spending

Sales come first because every other figure follows them: quantities and prices month by month, from last year's sales and existing contracts, together with the collection pattern. That pattern comes from the actual ageing of customer balances, prepared as described in Receivables Ageing, Collection and Expected Credit Losses in Egypt.

Then costs: variable costs as a ratio of sales, fixed costs at their monthly amount, and staff at everything the company bears for them, not their net pay. Unit costing in a manufacturing business is outside this piece; it is covered in Cost Accounting for Small Manufacturers in Egypt. Then cash: the opening balance, plus receipts, less payments. Finally capital spending: the assets needed, when they are bought and how they are paid for. The payments go into the cash budget in their months, and depreciation is charged to costs as set out in Fixed Assets in Egypt: Recognition, Capitalisation and Depreciation.

Illustrative example (hypothetical figures): a trading company has cash of EGP 200,000 on 1 January and expects sales of EGP 800,000, 900,000 and 1,000,000 in January, February and March. Assumptions: 40% of each month's sales is collected in that month and 60% in the next, and December sales were EGP 750,000; cost of goods is 70% of sales, paid in the month of sale; fixed costs are EGP 150,000 a month; a vehicle is bought for cash in February for EGP 300,000; the example ignores tax and financing.

Every month makes a profit before depreciation and tax (EGP 90,000, 120,000 and 150,000), yet cash falls to EGP 20,000 at the end of February, because the vehicle is paid for at once and 60% of sales is collected a month later. The budget shows this early, leaving time to pay in instalments, defer the purchase or arrange financing.

Following it up: monthly variance analysis and revision

Actual results are compared with the budget after the monthly accounting close, not before it: books with unreconciled bank accounts and unrecorded accruals produce variances that are not real. Both are covered in bank reconciliation and prepaid and accrued expenses.

Each significant variance between actual and budget is explained by its cause: volume, price, timing or a recording error. A timing variance in collections or payments does not change profit, but it can leave the company short of cash. In the example, if January collections were EGP 700,000 instead of 770,000 and the difference were not collected in February, the balance at the end of February would be a deficit of EGP 50,000.

The approved budget should remain a fixed yardstick throughout the year, with an updated forecast for the remaining months prepared alongside it whenever a key assumption changes, such as a selling price, an exchange rate or the loss of a major customer. Amending the budget itself whenever actual results drift away from it erases the variances instead of explaining them.

Taxes and social insurance in the cash budget

Tax and social insurance payments go into the cash budget in the months the law sets for payment; the full schedule is in Egypt's tax and social insurance compliance calendar. The main ones:

• The taxpayer (الممول) must "pay the amount of tax due as shown in the return on the same day it is filed", after deducting taxes withheld or collected, advance payments and any return due on them (Article 32 of Unified Tax Procedures Law 206 of 2020).
• The same law defines the registrant (المكلف) as the person "charged with collecting and remitting the tax to the Authority" (Article 1(8)), which in our reading includes a person whose sales have reached the VAT registration threshold; VAT collected therefore appears among receipts, and its remittance among the payments of its month.
• Salary tax is withheld by the employer from wages and remitted to the competent tax office within the first fifteen days of each month for the amounts withheld in the previous month (Article 14 of Income Tax Law 91 of 2005).
• Social insurance contributions due for a month are payable by the employer from the first day of the following month (Article 71 of the executive regulations of Social Insurance and Pensions Law 148 of 2019, issued by Prime Minister's Decree 2437 of 2021).

Enterprises subject to Law 6 of 2025 file their VAT return for each three-month period within the following month, together with payment of the tax, and their salary tax obligation is limited to the annual settlement return with payment (Article 12 of that law). In our view, amounts withheld from wages should not be treated as available cash in the budget, since they are due for remittance.

What this requires

• Prepare an annual budget spread over the months and approve it before the financial year begins, starting with sales and their collection pattern.
• Prepare a monthly cash budget for the next twelve months, with capital spending, taxes and social insurance in the months they are paid.
• Set a minimum cash balance, and arrange financing or change timing before the month in which the balance is expected to fall below it.
• Compare actual results with the budget after every monthly close and explain each significant variance; update the forecast for the remaining months when a key assumption changes, keeping the approved budget as the yardstick.
• Use the cash budget when assessing the entity's ability to continue as a going concern.

The firm's Accounting & Bookkeeping Department prepares budgets and monthly cash budgets, produces variance reports after each monthly close, and reviews the underlying assumptions with management.

Nehal Saied, Partner
Chartered Accountant, Ministry of Finance, Egypt

Member, Egyptian Tax Society
Member, Egyptian Society for Public Finance and Taxation

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Disclaimer: This bulletin is prepared for general information on the legislation in force at the date of its publication. It does not constitute a professional opinion or tax or legal advice on any particular matter, and it should not be relied upon in place of advice based on an examination of the circumstances of each case. Nassef & Partners International accepts no responsibility for any action taken, or refrained from, in reliance on its contents. The positions stated remain subject to subsequent legislation and decisions.