Question

V Company is expecting to have cash on hand on September 1 of $23,400. V Company is expecting to have sales of $92,750 in August and $76,500 in September. Of these amounts, 85 percent are expected to be cash sales and 15 percent are expected to be charge sales (i.e. credit sales). Based on company experience, the company expects 60 percent of credit sales to be collected in the month of sale, 38 percent of credit sales to be collected in the month following the month of sale, and 2 percent of credit sales not to be collected due to bad debts.

V Company is a retailer and also expects to purchase $62,000 of inventory in August and $59,000 of inventory in September, all on account. V Company usually pays 70 percent of charged purchases in the month of purchase and the other 30 percent of charged purchases in the month following purchase. Other costs for wages, utilities, rent, insurance, etc. are expected to be $26,200 per month.   

V Company normally likes to have at least a $20,000 cash balance on hand at all times.

REQUIRED: Prepare a Cash Budget for V Company for September only. Then indicate in a short paragraph after the budget whether V Company will have to seek financing to meet its desired minimum balance goal, and if so, provide a general figure of how much financing will be needed.

Please use Excel versus paper for answer.

Answer 1

V Company

Cash Budget

V Company
Cash Budget
for the month of September
Beginning cash balance	$23,400
Cash receipts from customers -
38% of August credit sales	$5,287
September cash sales	$65,025
60% of Sept. Credit sales	$6,885
Total cash receipts	$77,197
Cash Available	$100,597
Cash Disbursements -
Payment for August purchases	$18,600
Payment for Sept purchases	$41,300
Other expenses	$26,200
Total disbursements	$86,100
Excess of cash	$14,497
Minimum Cash balance	$20,000
Shortfall in cash	$5,503

Need for Financing –

The September cash budget for V Company indicates a shortfall of $5,503 from minimum cash balance of $20,000. The company can seek financing to address the cash shortfall. The financing options borrowing money either through overdraft facility with a bank or by refinancing. The company may negotiate a financing plan such as borrowing in denominations of $1,000 with a minimal annual rate of 10%.

V Company can repay the borrowing and the interest thereon as an when the company has excess cash balance (beyond the minimum balance of $20,000).

For instance,

Ending Cash Balance	$14,497	$27,000
Financing:
Borrowings	6,000
Repayments		-$6,000
Interest		($50)
Total Financing	$6,000	($6,050)
Ending Cash Balance	$20,497	$20,950

In the above example, the company borrows $6,000 in denominations of $1,000 to cover the cash shortfall of $5,503 at an annual interest rate of 10%. Assuming, the company’s cash balance is $27,000. V Company has $7,000 in excess of minimum cash balance of $20,000 the company would repay the borrowing and the interest thereon. Interest for one month = 6,000 x10% x 1/12 = $50. The company would repay the entire $6,050 in October.