Question

1. 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 $4,100 per month, and the rent is $2,300 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $250, but Koehl has agreed to maintain an average bank balance of $4,000 - 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 $120,000.

	Sales		Purchases
December	$150,000		$50,000
January	34,000		50,000
February	64,000		50,000

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

Part A - CASH BUDGET FOR DECEMBER TO FEBRUARY

Loan to be taken for January = $14,550.00

Cash Budget	December	January	February	Notes
Sales Receipts (A)	$150,000	$34,000	$64,000	Cash Sales
Less:
Payments for Purchases	$120,000	$50,000	$50,000	1 month credit. November Purchases = $120,000.
Salaries	$4,100	$4,100	$4,100	Salary for Koehl
Rent	$2,300	$2,300	$2,300
Taxes	$12,000	-	-	One-time tax payment in December
Total Payment (B)	$138,400	$56,400	$56,400
Net Cash Received (A-B)	$11,600	-$22,400	$7,600
Cash at beginning of forecast	$250	-	-
Net Cash Flow	$11,850	-$22,400	$7,600
Cumulative Net Cash Flow	$11,850	-$10,550	$11,600	Feb = Target Cash + Feb NCF. Assumed no part of loan taken in January was paid back
Target Cash Balance	$4,000	$4,000	$4,000
Surplus Cash or (-) loans needed	$7,850	-$14,550	$7,600	Cumulative NCF - Target Cash Flow

Part B - CASH BUDGET FOR DECEMBER TO FEBRUARY

Loan to be taken for December = $142,150.00

Cash Budget	December	January	February	Notes
Sales Receipts (A)	$0	$150,000	$34,000	Cash Sales till November. 30 days Credit Sales from December.
Less:
Payments for Purchases	$120,000	$50,000	$50,000	1 month credit. November Purchases = $120,000.
Salaries	$4,100	$4,100	$4,100	Salary for Koehl
Rent	$2,300	$2,300	$2,300
Taxes	$12,000	-	-	One-time tax payment in December
Total Payment (B)	$138,400	$56,400	$56,400
Net Cash Received (A-B)	-$138,400	$93,600	-$22,400
Cash at beginning of forecast	$250	-	-
Net Cash Flow	-$138,150	$93,600	-$22,400
Cumulative Net Cash Flow	-$138,150	$97,600	$75,200	Jan = Target Cash after loan + Jan NCF. Assumed no part of loan taken in December was paid
Target Cash Balance	$4,000	$4,000	$4,000
Surplus Cash or (-) loans needed	-$142,150	$93,600	$71,200	Cumulative NCF - Target Cash Flow