In: Finance
Problem 16-14
Cash Budgeting
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.
Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,000 per month, and the rent is $2,800 per month. In addition, she must make a tax payment of $13,000 in December. The current cash on hand (on December 1) is $450, but Koehl has agreed to maintain an average bank balance of $4,500 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)
The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $100,000.
Sales | Purchases | |||
December | $140,000 | $30,000 | ||
January | 42,000 | 30,000 | ||
February | 54,000 | 30,000 |
I. Collections and Purchases: | ||||||
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Sales | $ | $ | $ | |||
Purchases | $ | $ | $ | |||
Payments for purchases | $ | $ | $ | |||
Salaries | $ | $ | $ | |||
Rent | $ | $ | $ | |||
Taxes | $ | --- | --- | |||
Total payments | $ | $ | $ | |||
Cash at start of forecast | $ | --- | --- | |||
Net cash flow | $ | $ | $ | |||
Cumulative NCF | $ | $ | $ | |||
Target cash balance | $ | $ | $ | |||
Surplus cash or loans needed | $ | $ | $ |
a] | December | January | February | |
Sales | $ 1,40,000 | $ 42,000 | $ 54,000 | |
Purchases | $ 30,000 | $ 30,000 | $ 30,000 | |
Payments for purchases | $ 1,00,000 | $ 30,000 | $ 30,000 | |
Salaries | $ 4,000 | $ 4,000 | $ 4,000 | |
Rent | $ 2,800 | $ 2,800 | $ 2,800 | |
Taxes | $ 13,000 | $ - | $ - | |
Total payments | $ 1,19,800 | $ 36,800 | $ 36,800 | |
Cash at start of forecast | $ 450 | $ 20,650 | $ 25,850 | |
Net cash flow | $ 20,200 | $ 5,200 | $ 17,200 | |
Cumulative NCF | $ 20,200 | $ 25,400 | $ 42,600 | |
Target cash balance | $ 4,500 | $ 4,500 | $ 4,500 | |
Surplus cash or loans needed | $ 20,200 | $ 21,350 | $ 38,550 | |
b] | Loan requirement = 119800+4500-450 = | $ 1,23,850 |