5. Cashbudget

Mellon Companys financial managers are meeting with the companys bank to renew their line of credit and discuss their investment needs. They have prepared the companys operating cash budget for the last six months of the year.

The following budget assumptions were used to construct the budget:

	Mellons total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget.
	Mellons sales are made on credit with terms of 2/10, net 30. Mellons experience is that 25% is collected from customers who take advantage of the discount, 65% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts.
	The cost of materials averages 45% of Mellons finished product. The purchases are generally made one month in advance of the sale, and Mellon pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $88.00 million, then purchases during June would be $39.60 million ($88.00 million x 45%), and this amount would be paid in July.
	Other cash expenses include wages and salaries at 16% of monthly sales, monthly rent of $32.00 million, and other expenses equal to 5% of monthly sales. Estimated tax payments of $156.00 million and $164.80 million are required to be paid on July 15 and October 15, respectively. In addition, a $800.00 million payment for a new plant must be made in September.
	Assume that Mellons targeted cash balance is $120.02 million, and the estimated cash on hand on July 1 is $120.02 million.

Use the preceding information to fill in the missing amounts in the following cash budget for the period of July 1st to December 31st.

Mellon Company
($ millions)
Cash Budget
	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
Credit sales	$76.00	$78.40	$80.00	$80.80	$82.40	$84.00	$86.40	$88.00
Credit purchases		36.00		37.08	37.80	38.88	39.60
			Jul	Aug	Sep	Oct	Nov	Dec
Cash receipts
Collections from this months sales				$19.80	$20.19	$20.58	$21.17	$21.56
Collections from previous months sales				52.00	52.52	53.56	54.60	56.16
Collections from sales two months previously				7.84	8.00	8.08	8.24	8.40
Total cash receipts				$79.64	$80.71	$82.22	$84.01	$86.12
Cash disbursements
Payments for credit purchases			$36.00	$36.36	$37.08		$38.88	$39.60
Wages and salaries			12.80	12.93	13.18		13.82	14.08
Rent			32.00	32.00	32.00		32.00	32.00
Other expenses			4.00	4.04	4.12		4.32	4.40
Taxes			156.00
Payment for plant construction					800.00
Total cash disbursements			$240.80	$85.33	$886.38		$89.02	$90.08
Net cash flow
(Receipts disbursements)			-$162.64	-$5.69	-$805.67	-$170.02	-$5.01	-$3.96
Beginning cash balance			120.02	-$42.62	-$48.31	-$853.98	-$1,024.00	-$1,029.01
Ending cash balance			-$42.62	-$48.31		-$1,024.00	-$1,029.01	-$1,032.97
Target (minimum) cash balance			-120.02	-120.02		-120.02	-120.02	-120.02
Surplus (shortfall) cash			-$162.64	-$168.33		-$1,144.02	-$1,149.03	-$1,152.99

Use the information provided in the budget to complete the following sentences.

Mellon Company will be able to invest in short-term marketable securities in some months and will need to borrow to cover cash requirements in others. In the last six months of the year, Mellon will to end the year with a cash of and a cash of . Mellon Company will want a credit line of at least to cover the month with the greatest shortfall, and the financial managers can tell the bank to expect that they will be able to invest up to in short-term marketable securities.