Question

Step 1 Read the scenario.

Assume you are thinking about starting a business and would like to forecast your cash needs for the next six months. You expect sales to be approximately $30,000 per month for the first 12 months and your purchases to support sales will be approximately 60% of sales. You anticipate about 20% of your sales will be cash and 80% collected the following month. Your supplier has agreed to extend credit for 70 days at no cost (i.e. you will pay your bills on a two month lag). Your monthly expenses for rent, wages, utilities, and so forth will be approximately $3,500 per month. Identify which of these are fixed costs and which ones are variable costs. You have deposited $15,000 in a checking account to begin your operations and would like to maintain a minimum balance of $5,000 in that account.

Step 2 Create a simple monthly cash budget.

Create a spreadsheet file that contains a simple monthly cash budget for the next year for the business described in the above scenario.

Step 3 Answer the questions.

Use the scenario information to help you answer these questions:

Explain the purpose of creating budgets and how your budget will help the business remain capitalized

Will you need additional funds at some point? Justify your answer.

How would you raise capital in the future?

Answer 1

Solution :-
Sales		30000 per month
Cash Sales		6000
Credit sales (80%)		24000
Purchases	(60% of sales)		18000
				Cash Budget
Month	Jan	Feb	Mar	Apr	May	June	July	Aug	Sep	Oct	Nov	Dec
Opening Balance	15000	17500	44000	52500	61000	69500	78000	86500	95000	103500	112000	120500
Receipts
Cash sales (20%)	6000	6000	6000	6000	6000	6000	6000	6000	6000	6000	6000	6000
Receipts from debtors		24000	24000	24000	24000	24000	24000	24000	24000	24000	24000	24000
Total Receipts	6000	30000	30000	30000	30000	30000	30000	30000	30000	30000	30000	30000
Payments
Expenses	3500	3500	3500	3500	3500	3500	3500	3500	3500	3500	3500	3500
Purchase Payment			18000	18000	18000	18000	18000	18000	18000	18000	18000	18000
Total Payments	3500	3500	21500	21500	21500	21500	21500	21500	21500	21500	21500	21500
Net Balance	17500	44000	52500	61000	69500	78000	86500	95000	103500	112000	120500	129000
Withdrawl / Deposit	0	0	0	0	0	0	0	0	0	0	0	0
Closing Balance	17500	44000	52500	61000	69500	78000	86500	95000	103500	112000	120500	129000
Here in this wages are the variable costs and the rent expenses are the fixed cost
The Budget help the business in many ways such as :-
It helps to make future estimation about to expand business
It helps to make expenses upto a certified limit
We can easily judge the future needs of cash with this forecast
No We will not need any additional funds as there is a need to maintain a minimum balance of 5000 which is always maintain
We can raise the capital by showing our liquidity of the firm from this budget

Hope this will help you if you have any further doubt then please ask it in comments