Question

Cash Budget

Dr. Roger Jones is a successful dentist but is experiencing recurring financial difficulties. For example, Dr. Jones owns his office building, which he leased to the professional corporation that housed his dental practice. (He owns all shares in the corporation.) After the corporation’s failure to pay payroll taxes for the past 6 months, however, the Internal Revenue Service is threatening to impound the business and sell its assets. Also, the corporation has had difficulty paying its suppliers, owing one of them over $200,000 plus interest. In the past, Dr. Jones had borrowed money on the equity in either his personal residence or his office building, but he has grown weary of these recurring problems and has hired a local consultant for advice.

According to the consultant, the financial difficulties facing Dr. Jones have been caused by the absence of proper planning and control. Budgetary control is sorely needed. The following financial information is available for a typical month:

Revenues
	Average Fee ($)		Quantity
Fillings	50		90
Crowns	300		19
Root canals	170		8
Bridges	500		7
Extractions	45		30
Cleaning	25		108
X-rays	15		150

Costs
Salaries:
Two dental assistants			$1,900
Receptionist/bookkeeper			1,500
Hygienist			1,800
Public relations (Mrs. Jones)			1,000
Personal salary			6,500
Total salaries					$12,700
Benefits					1,344
Building lease					1,500
Dental supplies					1,200
Janitorial					300
Utilities					400
Phone					150
Office supplies					100
Lab fees					5,000
Loan payments					570
Interest payments					500
Miscellaneous					200
Depreciation					700
Total costs					$24,664

Benefits include Dr. Jones’s share of social security and a health insurance premium for all employees. Although all revenues billed in a month are not collected, the cash flowing into the business is approximately equal to the month’s billings because of collections from prior months. The office is open Monday through Thursday from 9:00 a.m. to 4:00 p.m. and on Friday from 9:00 a.m. to 12:30 p.m. A total of 32 hours are worked each week. Additional hours could be worked, but Dr. Jones is reluctant to do so because of other personal endeavors that he enjoys.

Dr. Jones has noted that the two dental assistants and receptionist are not fully utilized. He estimates that they are busy about 65 to 70% of the time. His wife spends about 5 hours each week on a monthly newsletter that is sent to all patients. She also maintains a birthday list and sends cards to patients on their birthdays.

Dr. Jones recently attended an informational seminar designed to teach dentists how to increase their revenues. An idea from that seminar persuaded him to invest in promotion and public relations (the newsletter and the birthday list).

Required:

1. Prepare a monthly cash budget for Dr. Jones. Enter amounts as positive numbers unless there is a deficiency.

Dr. Roger Jones
Cash Budget
Cash collections and cash available	$
Less cash disbursements:
Salaries	$
Benefits
Building lease
Dental supplies
Janitorial
Utilities
Phone
Office supplies
Lab fees
Loan payments
Interest payments
Miscellaneous
Total cash needs	$
Excess (deficiency) of cash available over needs	$

Feedback

Calculate monthly cash collections and cash available by multiplying average fees by quantity for each type if service shown in the revenue data. Next enter cash disbursements and total cash needs. Subtract cash needs from available cash to show either excess cash or a deficiency in cash.

2a. Dr. Jones must either increase revenues or cut costs or a combination of the two.

Consider this recommendation:

Extend office hours so that a total of 40 hours are worked each week. This could increase revenues by as much as $5,340. Dr. Jones would need to inform his assistants and receptionist of the increased time and indicate that each will receive a 25% increase in salary for the additional time. Benefits (primarily FICA and unemployment insurance benefits) would also increase. Other expenses that will likely increase with an increase in sales are dental supplies, lab fees, and utilities (representing about 31% of sales). The remaining expenses are fixed.

Prepare a cash budget that reflects this recommendation. Round intermediate calculations to the nearest dollar. Enter amounts as positive numbers unless there is a deficiency.

Dr. Roger Jones
Revised Cash Budget
Cash collections and cash available	$
Less cash disbursements:
Salaries	$
Benefits
Building lease
Dental supplies
Janitorial
Utilities
Phone
Office supplies
Lab fees
Loan payments
Interest payments
Miscellaneous
Total cash needs	$
Excess (deficiency) of cash available over needs	$

Feedback

Start with the cash budget prepared in Requirement 1 and incorporate the changes needed assuming an increased work week increases revenue.

Allocate the increase to dental supplies, lab fees, and utilities by using the proportion of each:

Increase dental supplies, lab fees, and utilities = 31% x Increase in sales (Round to the nearest dollar.)

Increase dental supplies = (Dental supplies / Dental supplies, lab fees, and utilities) x Increase dental supplies, lab fees, and utilities

2b. Consider this recommendation:

Cut one dental assistant, eliminate the salary to Mrs. Jones and the activities she does, and cut Dr. Jones’s salary back by $1,000 per month. Do not round intermediate calculations for the benefits savings. Enter amounts as positive numbers unless there is a deficiency.

Prepare a cash budget that reflects this recommendation.

Dr. Roger Jones
Revised Cash Budget
Cash collections and cash available	$
Less cash disbursements:
Salaries	$
Benefits
Building lease
Dental supplies
Janitorial
Utilities
Phone
Office supplies
Lab fees
Loan payments
Interest payments
Miscellaneous
Total cash needs	$
Excess (deficiency) of cash available over needs	$

Feedback

Start with the cash budget prepared in Requirement 1 and incorporate the cost savings to salaries and benefits. Remember that Dr. and Mrs. Jones are owners and benefits do not apply to their salaries which are owner withdrawals.

2c. A third possibility is to increase the fees charged for the various dental services.

What amount of increase in revenues is needed to cover the deficiency from Requirement 1?  $

Answer 1

1.

Dr. Roger Jones
Cash Budget
Cash collections and cash available	21360
Less cash disbursements:
Salaries	12700
Benefits	1344
Building lease	1500
Dental supplies	1200
Janitorial	300
Utilities	400
Phone	150
Office supplies	100
Lab fees	5000
Loan payments	570
Interest payments	500
Miscellaneous	200
Total cash needs	23964
Excess (deficiency) of cash available over needs	-2604

Cash collections and cash available = (50*90)+(300*19)+(170*8)+(500*7)+(45*30)+(25*108)+(15*150) = $21360

2a.

Dr. Roger Jones
Cash Budget
Cash collections and cash available ($21360 + $5340)	26700
Less cash disbursements:
Salaries [(1.25 x {$1900 + $1500}) + $1800 + $1000 + $6500]	13550
Benefits [$13550 x $1344/$12700]	1434
Building lease	1500
Dental supplies ($1200 + $301)	1501
Janitorial	300
Utilities ($400 + $100)	500
Phone	150
Office supplies	100
Lab fees ($5000 + $1254)	6254
Loan payments	570
Interest payments	500
Miscellaneous	200
Total cash needs	26559
Excess (deficiency) of cash available over needs	141

Increase dental supplies, lab fees, and utilities = 31% x Increase in sales = 31% x $5340 = $1655.40 rounded off to $1655

Increase dental supplies = (Dental supplies / Dental supplies, lab fees, and utilities) x Increase dental supplies, lab fees, and utilities = $1200/($1200 + $5000 + $400) x $1655 = $1200/$6600 x $1655 = $301

Increase lab fees = (Lab fees / Dental supplies, lab fees, and utilities) x Increase dental supplies, lab fees, and utilities = $5000/$6600 x $1655 = $1254

Increase utilities = (Utilities / Dental supplies, lab fees, and utilities) x Increase dental supplies, lab fees, and utilities = $400/$6600 x $1655 = $100

2b.

Dr. Roger Jones
Cash Budget
Cash collections and cash available	21360
Less cash disbursements:
Salaries [($1900/2) + $1500 + $1800 + ($6500 - $1000)]	9750
Benefits [$9750 x $1344/($1900 + $1500 + $1800)]	2520
Building lease	1500
Dental supplies	1200
Janitorial	300
Utilities	400
Phone	150
Office supplies	100
Lab fees	5000
Loan payments	570
Interest payments	500
Miscellaneous	200
Total cash needs	22190
Excess (deficiency) of cash available over needs	-830

2c.  Increase in revenue needed to cover the deficiency from requirement 1: $2604