C 3. The nature of a company’s business affects its need to budget for cash flows.

H&R Block is a service company whose main business is preparing tax returns.

Most tax returns are prepared after January 31 and before April 15. For a fee and interest, the company will advance cash to clients who are due refunds. The clients are expected to repay the cash advances when they receive their refunds.

Although H&R Block has some revenues throughout the year, it devotes most of the nontax season to training potential employees in tax preparation procedures and to laying the groundwork for the next tax season.

Toys “R” Us is a toy retailer whose sales are concentrated in October, November, and December of one year and January of the next year. Sales continue at a steady but low level during the rest of the year. The company purchases most of its inventory between July and September.

Johnson & Johnson sells the many health care products that it manufactures to retailers, and the retailers sell them to the final customer. Johnson & Johnson offers retailers credit terms.

Discuss the nature of cash receipts and cash disbursements over a calendar year in the three companies we have just described. What are some key estimates that the management of these companies must make when preparing a cash budget?

Budgeting Procedures