Cash Budget

Dr. Roger Jones is a successful dentist but is experiencing recurring financial difficulties. For example, Dr. Jones owns his office building, which he leased to the professional corporation that housed his dental practice. (He owns all shares in the corporation.) After the corporation's failure to pay payroll taxes for the past 6 months, however, the Internal Revenue Service is threatening to impound the business and sell its assets. Also, the corporation has had difficulty paying its suppliers, owing one of them over $200,000 plus interest. In the past, Dr. Jones had borrowed money on the equity in either his personal residence or his office building, but he has grown weary of these recurring problems and has hired a local consultant for advice.

According to the consultant, the financial difficulties facing Dr. Jones have been caused by the absence of proper planning and control. Budgetary control is sorely needed. The following financial information is available for a typical month:

RevenuesAverage Fee ($)QuantityFillings5090Crowns30019Root canals1708Bridges5007Extractions4530Cleaning25108X-rays15150

CostsSalaries:Two dental assistants$1,900Receptionist/bookkeeper1,500Hygienist1,800Public relations (Mrs. Jones)1,000Personal salary6,500Total salaries$12,700Benefits1,344Building lease1,500Dental supplies1,200Janitorial300Utilities400Phone150Office supplies100Lab fees5,000Loan payments570Interest payments500Miscellaneous200Depreciation700Total costs$24,664

Benefits include Dr. Jones's share of social security and a health insurance premium for all employees. Although all revenues billed in a month are not collected, the cash flowing into the business is approximately equal to the month's billings because of collections from prior months. The office is open Monday through Thursday from 9:00 a.m. to 4:00 p.m. and on Friday from 9:00 a.m. to 12:30 p.m. A total of 32 hours are worked each week. Additional hours could be worked, but Dr. Jones is reluctant to do so because of other personal endeavors that he enjoys.

Dr. Jones has noted that the two dental assistants and receptionist are not fully utilized. He estimates that they are busy about 65 to 70% of the time. His wife spends about 5 hours each week on a monthly newsletter that is sent to all patients. She also maintains a birthday list and sends cards to patients on their birthdays.

Dr. Jones recently attended an informational seminar designed to teach dentists how to increase their revenues. An idea from that seminar persuaded him to invest in promotion and public relations (the newsletter and the birthday list).

Required:

1.Explain a monthly cash budget for Dr. Jones. Enter amounts as positive numbers unless there is a deficiency.

Dr. Roger JonesCash BudgetCash collections and cash available$Less cash disbursements:Salaries$BenefitsBuilding leaseDental suppliesJanitorialUtilitiesPhoneOffice suppliesLab feesLoan paymentsInterest paymentsMiscellaneousTotal cash needs$Excess (deficiency) of cash available over needs$

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2a.Dr. Jones must either increase revenues or cut costs or a combination of the two.

Consider this recommendation:

Extend office hours so that a total of 40 hours are worked each week. This could increase revenues by as much as $5,340. Dr. Jones would need to inform his assistants and receptionist of the increased time and indicate that each will receive a 25% increase in salary for the additional time. Benefits (primarily FICA and unemployment insurance benefits) would also increase. Other expenses that will likely increase with an increase in sales are dental supplies, lab fees, and utilities (representing about 31% of sales). The remaining expenses are fixed.

explain a cash budget that reflects this recommendation. Round intermediate calculations to the nearest dollar. Enter amounts as positive numbers unless there is a deficiency.

Dr. Roger JonesRevised Cash BudgetCash collections and cash available$Less cash disbursements:Salaries$BenefitsBuilding leaseDental suppliesJanitorialUtilitiesPhoneOffice suppliesLab feesLoan paymentsInterest paymentsMiscellaneousTotal cash needs$Excess (deficiency) of cash available over needs$

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2b.Consider this recommendation:

Cut one dental assistant, eliminate the salary to Mrs. Jones and the activities she does, and cut Dr. Jones's salary back by $1,000 per month. Do not round intermediate calculations for the benefits savings. Enter amounts as positive numbers unless there is a deficiency.

Explain a cash budget that reflects this recommendation.

Dr. Roger JonesRevised Cash BudgetCash collections and cash available$Less cash disbursements:Salaries$BenefitsBuilding leaseDental suppliesJanitorialUtilitiesPhoneOffice suppliesLab feesLoan paymentsInterest paymentsMiscellaneousTotal cash needs$Excess (deficiency) of cash available over needs$