Question

Cash Budgeting

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,100 per month, and the rent is $1,600 per month. In addition, she must make a tax payment of $11,000 in December. The current cash on hand (on December 1) is $200, but Koehl has agreed to maintain an average bank balance of $7,000 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $140,000.

	Sales		Purchases
December	$120,000		$30,000
January	30,000		30,000
February	50,000		30,000

1. Prepare a cash budget for December, January, and February. Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign.

   Collections and Purchases:
   	December		January		February
   Sales (Collections)	$		$		$
   Purchases	$		$		$
   Payments for purchases	$		$		$
   Salaries	$		$		$
   Rent	$		$		$
   Taxes	$		---		---
   Total payments	$		$		$
   Cash at start of forecast	$		---		---
   Net cash flow	$		$		$
   Cumulative cash balance	$		$		$
   Target cash balance	$		$		$
   Surplus cash or loans needed	$		$		$

2. Suppose that Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.) Do not round intermediate calculations. Round your answer to the nearest dollar.

   $  

Answer 1

a) The cash budget from the given information follows and is explained below:

In the first sub division, it is given that the sales are collected in cash during the same month but the purchases are paid for the following month.

1. Sales - Given in the table in the question

2. Purchases - Given in the table in the question

3. Payment for the purchases - The payment is made a month after the purchase. Nov purchase of 140,000 is paid in Dec, Dec purchase of 30,000 is paid in Jan and so on.

4. Salaries - It is given that she pays herself 4100$ a month

5. Rent - The rent is given to be 1600$ a month

6. Taxes - To be paid in Dec, 11,000$

7. Total payment - Payment for purchases + Salaries + Rent + Taxes

8. Cash at start of forecast - 200$ is given to be available at the start of Dec. If the balance is more than 7000, that can be taken as cash for the next month. If not, a loan is taken to maintain balance at 7000$ as given in the question. In Dec, cash is negative, so loan needs to be taken to pay the negative balance and the 7000$ that needs to be maintained. In Jan, also the cash is negative, so a loan is taken. But, in Feb, the cash is in surpplus, so on loan needs to be taken the next month.

9. Net cash flow - Cash flow is from the sales in cash that month

10. Cummulative cash balance - Net cash flow + cash at start of forecast - total payments

11. Target cash balance - 7000$ every month given in the question.

12. Surplus cash or loans needed - Cummulative cash balance - target cash balance

b) It is given that sales are made on credit and collected in 30 days, which is the next month. Thus we get the following schedule:

	December	January	February
Sales	120000	30000	50000
Sales received		120000	30000
Purchases	30000	30000	30000
Payment for purchases	140000	30000	30000
Salaries	4100	4100	4100
Rent	1600	1600	1600
Taxes	11000
Total payments	156700	35700	35700
Cash at start of forecast	200	7000	84300
Net cash flow	0	120000	30000
Cumulative cash balance	-156500	91300	78600
Target cash balance	7000	7000	7000
Surplus cash or loans needed	-163500	84300	71600

Everything is the same as part a) except the sales recieved. Since this was started on Dec 1st, the payment recieved for Dec is zero. The sales made in Dec is paid in Jan, the sales made in Jan is paid in Feb, and so on.

Net cash flows = Sales received

The loan required is higher in the first month, but is not needed in the second two months.

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