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CASH BUDGETING Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of...

CASH BUDGETING

Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017:

May 2016 $186,000
June 186,000
July 372,000
August 540,000
September 720,000
October 360,000
November 360,000
December 90,000
January 2017 180,000

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

May 2016 $90,000
June 90,000
July 126,000
August 883,000
September 307,000
October 234,000
November 161,000
December 90,000

General and administrative salaries are approximately $26,000 a month. Lease payments under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are $2,600 a month. Income tax payments of $62,000 are due in September and December. A progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of $90,000 should be maintained throughout the cash budget period.

Prepare a monthly cash budget for the last 6 months of 2016. If no entry required, enter "0". Use minus sign to enter losses, loans outstanding or any other negative amounts.

May June July August September October November December January
Collections and purchases worksheet
Sales (gross) $ ________ $ ________ $ ________ $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Collections
During month of sale ________ ________ ________ ________ ________ ________ ________ ________
During 1st month after sale ________ ________ ________ ________ ________ ________ ________ ________
During 2nd month after sale ________ ________ ________ ________ ________ ________ ________ ________
Total collections $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Purchases
Labor and raw materials $ ________ $ ________ $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Payments for labor and raw materials $ ________ $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Cash gain or loss for month
Collections $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Payments for labor and raw materials ________ ________ ________ ________ ________ ________
General and administrative salaries ________ ________ ________ ________ ________ ________
Lease payments ________ ________ ________ ________ ________ ________
Miscellaneous expenses ________ ________ ________ ________ ________ ________
Income tax payments ________ ________ ________ ________ ________ ________
Design studio payment ________ ________ ________ ________ ________ ________
Total payments $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Net cash gain (loss) during month $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Loan requirement or cash surplus
Cash at start of month $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Cumulative cash $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Target cash balance $ ________ $ ________ $ ________ $ ________ $ ________ $ ________
Cumulative surplus cash or loans outstanding to maintain $90,000 target cash balance
$ ________ $ ________ $ ________ $ ________ $ ________ $ ________


Prepare monthly estimates of the required financing or excess funds - that is, the amount of money Bowers will need to borrow or will have available to invest. Round your answers to the nearest dollar. Enter loans outstanding with minus sign.

July $ ________
August $ ________
September $ ________
October $ ________
November $ ________
December $ ________

Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 or 1/31 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects.

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

_________________

Bowers' sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

_________________

Solutions

Expert Solution

May June July August September October November December January
Collections and Purchases worksheet
Sales (gross) 186000 186000 372000 540000 720000 360000 360000 90000 180000
Collections
During month of sale (10%) 18600 18600 37200 54000 72000 36000 36000 9000 18000
During 1st month of sale (75%) 139500 139500 279000 405000 540000 270000 270000 67500
During 2nd Month of sale (15%) 27900 27900 55800 81000 108000 54000 54000
Total Collections 18600 158100 204600 360900 532800 657000 414000 333000 139500
Purchases
Labor and Raw Materials 90000 90000 126000 883000 307000 234000 161000 90000
Payments for Labor and raw materials 90000 90000 126000 883000 307000 234000 161000 90000
Cash Gain or Loss During the month
Collections 204600 360900 532800 657000 414000 333000 139500
Payments for Labor and raw materials 90000 126000 883000 307000 234000 161000 90000
General and administrative salaries 26000 26000 26000 26000 26000 26000 26000
Lease Payments 9000 9000 9000 9000 9000 9000 9000
Miscellaneous Expenses 2600 2600 2600 2600 2600 2600 2600
Income Tax Payments 62000 62000
Design Studio Payment 180000
Total Payments 127600 163600 982600 524600 271600 198600 189600
Net Cash gain or (loss) during the month 77000 197300 -449800 132400 142400 134400 -50100
Loan requirement or cash surplus
Cash at the start of the month 132000 209000 406300 90000 222400 364800 499200
Cumulative Cash 209000 406300 -43500 222400 364800 499200 449100
Target Cash balance 90000 90000 90000 90000 90000 90000 90000
Cumulative surplus cash or loans outstanding to maintain $90,000 target cash balance 119000 316300 -133500 132400 274800 409200 359100

Funds available for inveting or funds needed to be borrowed

July 119000
August 316300
September -133500
October 132400
November 274800
December 409200

If receipts are received uniformly throughout the month and the payments have to be done by 5th the above cashflow calculations will be no longer valid. Following calculations show the shortfall that will be faced.

July August September October November December January
Collections 204600 360900 532800 657000 414000 333000 139500
No of Days 31 31 30 31 30 31 31
Avearge collection per day 6600 11641.94 17760 21193.55 13800 10741.94 4500
Collection till 5th of the month 33000 58209.68 88800 105967.7 69000 53709.68 22500
Payments to be made 127600 163600 982600 524600 271600 198600 189600
Shortfall -94600 -105390 -893800 -418632 -202600 -144890 -167100

This shortfall will have to be come over by borrowing from the bank and eventually repaying it as the further collections coming in.

Bowers sales are seasonal. This means the collection of sales will increase or decrease as per the season. When the collection is low, Bowers will have to borrow more increasing the debt ratio and lowering the current ratio. Banks are more willinging to provide funds to those companies who have a high current ratio and a low debt to equity ratio. as otherwise it creates a situation for dout if the ompany will be able to generate enough cash to meet its debt obligations.


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