6. Cash budget
6. Cash budget Aa Aa E Capel Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year. The following budget assumptions were used to construct the budget: Capel's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. Capel's sales are made on credit with terms of 2/10, net 30. Capel's experience is that 15% is collected from customers who take advantage of the discount, 75% 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 Capel's finished product. The purchases are generally made one month in advance of the sale, and Capel pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,320 million, then purchases during June would be $594 ($1,320 million x 0.45), and this amount would be paid in July. Other cash expenses include wages and salaries at 20% of sales, monthly rent of $48 million, and other expenses at 5% of sales. Estimated tax payments of $70 million and $73 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,200 million payment for a new plant must be made in September. Assume that Capel's targeted cash balance is $300, and the estimated cash on hand on July 1 is $280. Use the preceding information to fill in the missing amounts in the following cash budget. May $1,140 June $1,176 540 July $1,200 August September $1,212 $1,236 556 567 Credit sales Credit purchases October $1,260 583 November $1,296 594 December $1,320 $1, July August September October November December Cash receipts Collections from this month's sales Collections from previous month's sales Collections from sales two months previously Total cash receipts 194 972 178 900 118 $1,196 182 909 120 $1,211 185 927 121 $1,233 191 945 124 $1,260 126 $1,292 583 DDDDD Cash disbursements Payments for credit purchases Wages and salaries Rent Other expenses Taxes Payment for plant construction Total cash disbursements Net cash flow (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash 1,200 $2,113 | $958 $896 $955 $972 $300 494 -$902 794 $230 -108 $214 280 $494 300 $194 $320 427 $747 300 $794 300 $494 $305 122 $427 300 $127 $122 300 -$178 $447 Use the information provided in the budget to complete the following sentences. Capel 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, Capel will to end the year with a cash of $ and a cash of $ Capel 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
