Question

You are hired as a financial manager and your first task is to establish the cash budget of your firm.

You gathered the following information.

The firm receives all income from sales

• Sales estimates (in millions)
  12. Q1 = 1,000; Q2 = 1,250; Q3 = 1,500; Q4 = 2,000; Q1 next year = 1,200
• Accounts receivable
  12. Beginning receivables = $3000
  13. Average collection period = 45 days
• Accounts payable
  12. Purchases = 60% of next quarter’s sales
  13. Beginning payables = 1,200
  14. Accounts payable period is 45 days
• Other expenses
  12. Wages, taxes, and other expense are 25% of sales
  13. Interest and dividend payments are $100
  14. A major capital expenditure of $500 is expected in the second quarter
• The initial cash balance is $100 and the company maintains a minimum balance of $50

Answer 1

AR collection		Q1	Q2	Q3	Q4	Q1-next year
	Sale	$        1,000	$       1,250	$        1,500	$       2,000	$      1,200
	Since AR collection period is 45 days, 50% collected in same quarter and 50% in next quarter
	Collection in same quarter-50%	$           500	$          625	$           750	$       1,000
	Collection in next quarter-50%		$          500	$           625	$          750
	Opening AR collection	$        3,000
	AR collection	$       3,500	$      1,125	$       1,375	$      1,750
AP Payment
		Q1	Q2	Q3	Q4	Q1-next year
	Sale	$        1,000	$       1,250	$        1,500	$       2,000	$      1,200
	Purchase-60% of next quarter sale	$           750	$          900	$        1,200	$          720
	Payment in same quarter-50%	$           375	$          450	$           600	$          360
	Payment in next quarter-50%		$          375	$           450	$          600
	Opening AR Payment	$        1,200
	AP Payment	$       1,575	$          825	$       1,050	$          960
Wages
		Q1	Q2	Q3	Q4
	Sale	$        1,000	$       1,250	$        1,500	$       2,000
	Wages-25% of sale	$           250	$          313	$           375	$          500
Cash Budget
		Q1	Q2	Q3	Q4
	Beginning balance	$           100	$       1,675	$        1,063	$          913
	Budgeted receipt	$        3,500	$       1,125	$        1,375	$       1,750
	Less AP payment	$      (1,575)	$        (825)	$      (1,050)	$        (960)
	Less Wages payment	$         (250)	$        (313)	$         (375)	$        (500)
	Less Interest & dividend	$         (100)	$        (100)	$         (100)	$        (100)
	Less capital expenditure		$        (500)
	Preliminary cash balance	$        1,675	$       1,063	$           913	$       1,103
	Borrow/(Repayment)
	Closing balance	$        1,675	$       1,063	$           913	$       1,103