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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 | 882,000 | |
| September | 306,000 | |
| October | 234,000 | |
| November | 162,000 | |
| 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 $63,000 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
solution:
Answer a: Preperation of Monthly Cash budget
| CASH BUDGET (in $) | july | august | september | october | november | december |
| Opening cash | 132,000.00 | 209,000.00 | 406,300.00 | 90,000.00 | 223,400.00 | 365,800.00 |
| Add: Revenue from sales | 204,600.00 | 360,900.00 | 532,800.00 | 657,000.00 | 414,000.00 | 333,000.00 |
| Total Cash available | 336,600.00 | 569,900.00 | 939,100.00 | 747,000.00 | 637,400.00 | 698,800.00 |
| Less: Labour & raw material payment | 90,000.00 | 126,000.00 | 882,000.00 | 306,000.00 | 234,000.00 | 162,000.00 |
| Less: General & Admin Salaries | 26,000.00 | 26,000.00 | 26,000.00 | 26,000.00 | 26,000.00 | 26,000.00 |
| Less: lease payments | 9,000.00 | 9,000.00 | 9,000.00 | 9,000.00 | 9,000.00 | 9,000.00 |
| Less: depreciation(Non cash item) | - | - | - | - | - | - |
| Less: Misc. expenses | 2,600.00 | 2,600.00 | 2,600.00 | 2,600.00 | 2,600.00 | 2,600.00 |
| Less: Income tax (sept & dec) | - | - | 63,000.00 | - | - | 63,000.00 |
| Less: new design studio payment(oct) | - | - | - | 180,000.00 | - | - |
| Net cash Gain During The Month | 209,000.00 | 406,300.00 | (43,500.00) | 223,400.00 | 365,800.00 | 436,200.00 |
| Target Cash Balances | 90,000.00 | 90,000.00 | 90,000.00 | 90,000.00 | 90,000.00 | 90,000.00 |
| Surplus cah / (Loan) | 119,000.00 | 316,300.00 | (133,500.00) | 133,400.00 | 275,800.00 | 346,200.00 |
working Notes:
1) Calculation of sales collected during the month
| May | june | july | august | september | october | november | december | january | |
| Sales of the month | 186,000.00 | 186,000.00 | 372,000.00 | 540,000.00 | 720,000.00 | 360,000.00 | 360,000.00 | 90,000.00 | 180,000.00 |
| 10%,cash collected in same month | - | - | 37,200.00 | 54,000.00 | 72,000.00 | 36,000.00 | 36,000.00 | 9,000.00 | 18,000.00 |
| 75%, of previous month rec. | - | - | 139,500.00 | 279,000.00 | 405,000.00 | 540,000.00 | 270,000.00 | 270,000.00 | 67,500.00 |
| 15%, in second month | - | - | 27,900.00 | 27,900.00 | 55,800.00 | 81,000.00 | 108,000.00 | 54,000.00 | 54,000.00 |
| Total revenvue received in month | 204,600.00 | 360,900.00 | 532,800.00 | 657,000.00 | 414,000.00 | 333,000.00 | 139,500.00 |
2) Calculation of Labour and Raw Material paid in month
| May | june | july | august | september | october | november | december | january | |
| Cost of the month | 90,000.00 | 90,000.00 | 126,000.00 | 882,000.00 | 306,000.00 | 234,000.00 | 162,000.00 | 90,000.00 | - |
| Payment made in following month | - | 90,000.00 | 90,000.00 | 126,000.00 | 882,000.00 | 306,000.00 | 234,000.00 | 162,000.00 | 90,000.00 |
Answer c:
Estimates of the required financing or excess funds
| Cash available for investment | Loan Taken | |
| July | 119,000.00 | |
| August | 316,300.00 | |
| September | - | 133,500.00 |
| October | 133,400.00 | |
| November | 275,800.00 | |
| December | 346,200.00 |
Answer e:
If uniform sale collection is made and all payment is made on 5th of respective month then situation will remain same, however now loan is required on 5th of september as there will be less cash available to make payments of the exepnses on 5th. (as shown in working )
| july | august | september | october | november | december | |
| opening cash | 132,000.00 | 376,400.00 | 752,800.00 | 490,200.00 | 326,600.00 | 415,000.00 |
| 5 days sales collection | 60,000.00 | 87,096.77 | 120,000.00 | 58,064.52 | 60,000.00 | 14,516.13 |
| amount available for payment | 192,000.00 | 463,496.77 | 872,800.00 | 548,264.52 | 386,600.00 | 429,516.13 |
| Total payment made on 5th | 127,600.00 | 163,600.00 | 982,600.00 | 523,600.00 | 271,600.00 | 262,600.00 |
| cash availbale/(loan taken) |
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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
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following sales forecasts for the firm for parts of 2019 and
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May 2019
$186,000
June
186,000
July
372,000
August
540,000
September
720,000
October
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November
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December
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January 2020
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Estimates regarding payments obtained from the credit department
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June 180,000
July 360,000
August 540,000
September 720,000
October 360,000
November 360,000
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Estimates regarding payments obtained from the credit department
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for parts of 2019 and 2020:
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$180,000
June
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July
360,000
August
540,000
September
720,000
October
360,000
November
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December
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January 2020
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