16-14 Cash Budgeting--Challenging Problem

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 neccessitatied 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 during the following month. Koehl pays herself a salary of $4,800 per month and the rent is $2,000 per month. In addition she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6,000--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 lesson 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 $160,000 $40,000

January $40,000 $40,000

February $60,000 $40,000

a. Prepare a cash budget for December, January and February---The answer is February Surplus = $2,000--Show all work and formulas to support answer.

b. 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). The answer is $164,400. show all work and formulas to support answer.