Question

Bradley Cooper operates a distributor business which he started in 2009. The business is doing well, so he is contemplating expansion for the upcoming year 2012, to meet the orders of a large customer recently received. He wants to make sure that he does not foul up with this order and has asked you to prepare his budget for the next year which should include the new customer's orders. This will help him to see if he will have sufficient cash or will need to negotiate an overdraft facility or a loan with his bankers, since he wants to maintain a cash balance of at least $15,000 at all times. He has supplied you with the following information:

1. His opening balance at January 1, 2012 is expected to be $14,000.

2. 80% of all sales are made for cash, and the other 20% collected in the following month.

3. Sales revenue are projected as: December 2011 $14,000; Jan 2012 $37,000; Feb 2012 $41,000, March 2012 $31,000.

4. Purchases are paid for the month following purchase. It is expected that $8,250 will be owing to suppliers at December 31, 2011.

5. John purchases are 55% of total monthly sales.

6. Salaries for two new staff members will be $4,800 per month as of January 1, 2012.

7. Rent is $3,600 per quarter payable January, April, July and October.

8. Electricity costs approximate to $1,650 per month.

9. Drawings for John's living expenses will be $2,750 per month.

10. John will deliver to the new customer so will purchase a used pick-up in January, 2012 from his father for $30,000. Petrol will cost $3,000 per month

Required:

a) Prepare Bradley's cash budget for the first quarter of 2012.

b) What advice would you offer to Bradley?

Answer 1

	Jan	Feb	Mar
Sales	37,000	41,000	31,000
Type of Sale:
Credit 20%	7,400	8,200	6,200
Cash 80%	29,600	32,800	24,800
Collection of Receivables:
Following Month	2,800	7,400	8,200
Total Budgeted Cash Receipts	32,400	40,200	33,000
Purchases (55% of total sales)	20,350	22,550	17,050
Payables:
Following Month	8,250	20,350	22,550
Cash Payments :
Salaries	4,800	4,800	4,800
Rent	3,600
Electricity	1,650	1,650	1,650
Living Expenses	2,750	2,750	2,750
Pick Up Purchase	30,000
Petrol	3,000	3,000	3,000
Total Payment	54,050	26,800	29,000
Cash Budget	Oct	Nov	Dec
Beginning Cash Balance	14,000	15,000	15,000
Add: Total Budgeted Cash Receipts	32,400	40,200	33,000
Less: Payments	54,050	26,800	29,000
Cash Available	-7,650	28,400	19,000
Desired Minimum Cash Balance	15,000	15,000	15,000
Excess (Shortage)	-22,650	13,400	4,000
Loans or Borrowings	22,650
Repayment		13,400	4,000
It is advised to repay loan when cash balance is more than the desired cash balance.