Question

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 $4,300 per month, and the rent is $1,700 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $200, 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	$120,000		$35,000
January	40,000		35,000
February	54,000		35,000

1. Prepare a cash budget for December, January, and February.

   I. Collections and Purchases:
   	December	January	February
   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	$	$	$

   
   
2. Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)
   $

Answer 1

	Answer a. Prepare a cash budget from December to February
	CASH BUDGET FOR THE MONTHS OF DECEMBER ,JANUARY,FEBRUARY
	Particulars	December	January	February
	Collections and Purchases:
	Sales ( Cash basis)	$120000	$40000	$54000
A	Net Collections	$120000	$40000	$54000
	Purchases	$35000	$35000	$35000
	Payments for purchases	$100000	$35000	$35000
	Salaries	$4300	$4300	$4300
	Rent	$1700	$1700	$1700
	Taxes	$12000	0	0
B	Total payments	$118000	$41000	$41000
C	Cash at start of forecast	$200	$2300	$3200
D= A-B	Net cash flow	$2000	-$1000	$13000
E=C+D	Cumulative NCF	$2200	$1300	$16200
F	Target cash balance	$4500	$4500	$4500
G =F-E	Surplus cash or loans needed	$2300	$3200	-$11700

Working Note :
Sales	sales will be collected in same month as it is said all sales are in cash
Purchase	As Koehl's purchases must be paid for during the following month ,so November Month`s payment will be done in Dec and so on.
Target cash balance	it is assumed that target cash balance of average $4500 for all 3 months
Cash at start of forecast	December months closing cash balance or surplus cash needed will be carried forward as next month`s opening balance for cash.
Total paymets is summation of :	Payments for purchases + salaries+rent +taxes
Surplus cash or loans needed =	Target cash balance-Cumulative NCF

b. suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint:The calculations required to answer this part are minimal.)

for calculating b we must require sales for the month of November as Customers will pay amount of credit sales in the following month so for preparing cash budget of December November sales must be there as it is in credit will be received in December and so on.