Question

P4-15 (similar to)

Multiple cash

budgetslong dash—Scenario

analysis   ​Brownstein, Inc., expects sales of $101,000 during each of the next 3 months. It will make monthly purchases of $56,000 during this time. Wages and salaries are $ 10,000 per month plus 6 %of sales. Brownstein expects to make a tax payment of $25,000 in the next month and a $19,000 purchase of fixed assets in the second month and to receive $8,000 in cash from the sale of an asset in the third month. All sales and purchases are for cash. Beginning cash and the minimum cash balance are assumed to be zero.

a. Construct a cash budget for the next 3 months.

b. Brownstein is unsure of the sales​ levels, but all other figures are certain. If the most pessimistic sales figure is $81,000

per month and the most optimistic is $121,000 per​ month, what are the monthly minimum and maximum ending cash balances that the firm can expect for each of the​ 1-month periods?

c. Briefly discuss how the financial manager can use the data in parts a. and b. to plan for financing needs.

Answer 1

(a):

	Month 1	Month 2	Month 3
Opening cash balance	-	3,940.00	13,880.00
Sales	101,000.00	101,000.00	101,000.00
Cash from sale of asset			8,000.00
Total inflow	101,000.00	101,000.00	109,000.00
Cash payments/disbursements:
Purchases	56,000.00	56,000.00	56,000.00
Wages and Salaries: Fixed	10,000.00	10,000.00	10,000.00
Wages and Salaries: Variable (6% of sales)	6,060.00	6,060.00	6,060.00
Tax payment	25,000.00
Purchase of fixed assets		19,000.00
Total outflow	97,060.00	91,060.00	72,060.00
Closing cash balance	3,940.00	13,880.00	50,820.00

(b): Pessimistic scenario:

	Month 1	Month 2	Month 3
Opening cash balance	-	-   14,860.00	-   23,720.00
Sales	81,000.00	81,000.00	81,000.00
Cash from sale of asset			8,000.00
Total inflow	81,000.00	81,000.00	89,000.00
Cash payments/disbursements:
Purchases	56,000.00	56,000.00	56,000.00
Wages and Salaries: Fixed	10,000.00	10,000.00	10,000.00
Wages and Salaries: Variable (6% of sales)	4,860.00	4,860.00	4,860.00
Tax payment	25,000.00
Purchase of fixed assets		19,000.00
Total outflow	95,860.00	89,860.00	70,860.00
Closing cash balance	-   14,860.00	-   23,720.00	-      5,580.00

Optimistic scenario:

	Month 1	Month 2	Month 3
Opening cash balance	-	22,740.00	51,480.00
Sales	121,000.00	121,000.00	121,000.00
Cash from sale of asset			8,000.00
Total inflow	121,000.00	121,000.00	129,000.00
Cash payments/disbursements:
Purchases	56,000.00	56,000.00	56,000.00
Wages and Salaries: Fixed	10,000.00	10,000.00	10,000.00
Wages and Salaries: Variable (6% of sales)	7,260.00	7,260.00	7,260.00
Tax payment	25,000.00
Purchase of fixed assets		19,000.00
Total outflow	98,260.00	92,260.00	73,260.00
Closing cash balance	22,740.00	51,480.00	107,220.00

	Month 1	Month 2	Month 3
Monthly mimimum ending cash balance	-   14,860.00	-   23,720.00	-      5,580.00
Monthly maximum ending cash balance	22,740.00	51,480.00	107,220.00

(c):  The financial manager can plan for financing needs by considering an average estimate of the optimistic and pessimistic sales scenarios. This will give the financial manager the most likely sales position and the most likely ending cash balance for each period. Using this number the manager can also determine the desired the minimum cash balance required at the end of each month and borrow any deficiency for meeting the same.