Question

Q: If the company needs a minimum cash balance of $25,000 to start each month, can the loan be repaid as planned? Please explain.

The McClain Corp. is a distributor of hair care products and is ready to start the third quarter, in which its peak sales occur. The company has requested a $ 75,000, 90-day loan from its bank to help them meet their cash requirements for the third quarter. Because McClain Corp has experienced difficulty in paying off their loans in previous years, the loan officer has requested the company to prepare a cash budget for the third quarter.

The following data has been gathered by the staff.

1. On July 1, 20X9, the beginning of the third quarter, the company will have a cash balance of $ 51,000.
2. Actual sales for the last 2 months and budgeted sales for the third quarter (all sales are on account).

Month	Amount in Dollars ($)
May (actual)	410,000
June (actual)	380,000
July (budgeted)	440,000
August (budgeted)	470,000
September (budgeted)	420,000

Past experience shows that 25% of a month's sales are collected in the month of sale, 70% in the month following the sale, and 2% in the second month following the sale. The remainder is uncollectible.

3. Budgeted merchandise purchases and budgeted expenses for the third quarter are provided below.

	July	August	September
Purchases (Merchandise)	$180,000	$175,000	$165,000
Salaries	$85,000	$85,000	$75,000
Advertising	$100,000	$110,000	$120,000
Rent Payments	$35,000	$35,000	$35,000
Depreciation	$45,000	$45,000	$45,000

Merchandise purchases are paid in full during the month following purchase. The accounts payable for merchandise purchases on June 30, which will be paid during the month of July, total $165,000.

4. The company will purchase equipment for the month of July, which is expected to cost $20,000, and it will be paid during the month of July.
5. In preparing the cash budget, assume that the $75,000 loan will be made in July and repaid in September. Interest on the loan will be $3,500.

Answer 1

McClain Corp.
Cash Budget
	July	August	September	Third Quarter
Beginning cash balance	$51,000	$105,200	$128,300	$284,500
Add: Cash receipts (see note)	$384,200	$433,100	$442,800	$1,260,100
Total cash available (a)	$435,200	$538,300	$571,100	$1,544,600
Less: Expenses:
Purchases (merchandise)	$165,000	$180,000	$175,000	$520,000
Salaries	$85,000	$85,000	$75,000	$245,000
Advertising	$100,000	$110,000	$120,000	$330,000
Rent payments	$35,000	$35,000	$35,000	$105,000
Equipment purchase	$20,000	$0	$0	$20,000
Total cash expenses (b)	$405,000	$410,000	$405,000	$1,220,000
Excess/ Shortage of cash (a - b)	$30,200	$128,300	$166,100	$324,600
Borrowings	$75,000	$0	$0	$75,000
Repayments	$0	$0	($75,000)	($75,000)
Interest payments	$0	$0	($3,500.00)	($3,500)
Ending cash balance	$105,200	$128,300	$87,600	$321,100
Notes:
McClain Corp.
Cash Receipts Schedule
	July	August	September	Third Quarter
Cash collections from:
May ($410,000*2/100)	$8,200			$8,200
June ($380,000*70/100); ($380,000*2/100)	$266,000	$7,600		$273,600
July ($440,000*25/100); ($440,000*70/100); ($440,000*2/100)	$110,000	$308,000	$8,800	$426,800
August ($470,000*25/100); ($470,000*70/100)		$117,500	$329,000	$446,500
September ($420,000*25/100)			$105,000	$105,000
Total cash receipts	$384,200	$433,100	$442,800	$1,260,100