Question

Dorothy Koehl recently leased space in the southsife mall and opened a new business Koehls 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. Koehls purchases must be paid for during the following month. Koehl pays herself a salary of $4200 per month, and the rent is $1600 per month. In addition she must make a tax payment of $12000 in December. The current cash on hand on December 1 is $450, but Koehl has agreed to maintain an average bank balance of $4500 tbis us her target cash balance.

The estimated sales and purchases for Decemeber, January, and February are shown below. Purchased during November amounted to $160000.

Sales. Purchases

December. $170000. $30000

January. $34000. $30000

February. 56000. 30000

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

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

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?

Answer 1