Question

Philip Spencer of the Spencer Corporation wants you to forecast the firm’s financing needs over the fourth quarter (October through December). He has made the following observations relative to planned cash receipts and disbursements:

Interest on a $75,000 bank note (principal due next March) at an 8 percent annual rate is payable in December for the three-month period just ended.

The firm follows a policy of paying no cash dividends.

Actual historical and future predicted sales are as follows:

Historical Sales		Predicted Sales
August	$150,000	October	$200,000
September	175,000	November	220,000
		December	180,000
		January	200,000

The firm has a monthly rental expense of $5,000.

Wages and salaries for the coming months are estimated at $25,000 per month.

Of the firm’s sales, 25 percent is collected in the month of the sale, 35 percent one month after the sale, and the remaining 40 percent two months after the sale.

Merchandise is purchased one month before the sales month and is paid for in the month it is sold. Purchases equal 75 percent of sales.

Tax prepayments are made quarterly, with a prepayment of $10,000 in October based on earnings for the quarter ended September 30.

Utility costs for the firm average 3 percent of sales and are paid in the month they are incurred.

Depreciation expense is $20,000 annually.

Question 1 Prepare a monthly cash budget for the three-month period ending in December.

Question 2 If the firm’s beginning cash balance for the budget period is $7,000, and this is its desired minimum balance, determine when and how much the firm will need to borrow during the budget period. The firm has a $50,000 line of credit with its bank, with interest (10 percent annual rate) paid monthly. For example, interest on a loan taken out at the end of September would be paid at the end of October and every month thereafter, as long as the loan was outstanding.

Answer 1

1)	SALES BUDGET:	August	September	October	November	December	Quarter	January
	Budgeted monthly sales	150000	175000	200000	220000	180000		200000
2)	RECEIVABLES COLLECTION BUDGET:
	In the month of sale			50000	55000	45000	150000
	One month after the sale			61250	70000	77000
	Two months after the sale			60000	70000	80000
	Total monthly collection from receivables			171250	195000	202000
3)	PURCHASES BUDGET:
	Purchases for the month		150000	165000	135000	150000	450000
4)	PURCHASES DISBURSEMENT BUDGET:
	Payment for purchases			150000	165000	135000	450000
5)	CASH BUDGET:
	Beginning balance of cash			7000	10000	10000	7000
	Add: Receipts from customers			171250	195000	202000	568250
	Total cash available			178250	205000	212000	575250
	Disbursements:
	Payments for purchases			150000	165000	135000	450000
	Rent			5000	5000	5000	15000
	Wages and salaries			25000	25000	25000	75000
	Utilities			6000	6600	5400	18000	`
	Tax prepayment			10000			10000
	Interest on bank note (75000*8%*3/12)					1500	1500
	Total disbursements			196000	201600	171900	569500
	Surplus/Deficit for the month			-17750	3400	40100	5750
	Financing:
	Borrowing			27750	6831	0	34581
	Principal repayments			0	0	29812	29812
	Interest payment			0	231	288	519
	Total financing			27750	6600	-30100	4250
	Ending cash balance			10000	10000	10000	10000