Cash budgeting

Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2011 and 2012:

	May 2011	$186,000
	June	186,000
	July	372,000
	August	540,000
	September	720,000
	October	360,000
	November	360,000
	December	90,000
	January 2012	180,000

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

	May 2011	$90,000
	June	90,000
	July	126,000
	August	883,000
	September	307,000
	October	234,000
	November	162,000
	December	90,000

General and administrative salaries are approximately $28,000 a month. Lease payments under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are $2,800 a month. Income tax payments of $62,000 are due in September and December. A progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of $90,000 should be maintained throughout the cash budget period.

Prepare a monthly cash budget for the last 6 months of 2011. If no entry required, leave the cell blank. Use minus sign to enter losses, loans outstanding or any other negative amounts.

May

June

July

August

September

October

November

December

January

Collections and purchases worksheet

Sales (gross)

$

$

$

$

$

$

$

$

$

Collections

During month of sale

$

$

$

$

$

$

$

$

During 1st month after sale

$

$

$

$

$

$

$

$

During 2nd month after sale

$

$

$

$

$

$

$

$

Total collections

$

$

$

$

$

$

Purchases

Labor and raw materials

$

$

$

$

$

$

$

$

Payments for labor and raw materials

$

$

$

$

$

$

$

Cash gain or loss for month

Collections

$

$

$

$

$

$

Payments for labor and raw materials

$

$

$

$

$

$

General and administrative salaries

$

$

$

$

$

$

Lease payments

$

$

$

$

$

$

Miscellaneous expenses

$

$

$

$

$

$

Income tax payments

$

$

$

$

$

$

Design studio payment

$

$

$

$

$

$

Total payments

$

$

$

$

$

$

Net cash gain (loss) during month

$

$

$

$

$

$

Loan reqiutement or cash surplus

Cash at start of month

$

$

$

$

$

$

Cumulative cash

$

$

$

$

$

$

Target cash balance

$

$

$

$

$

$

Cumulative surplus cash or loans

outstanding to maintain $90,000 target cash balance

$

$

$

$

$

$

Prepare monthly estimates of the required financing or excess funds - that is, the amount of money Bowers will need to borrow or will have available to invest. Round your answers to the nearest cent. Enter loans outstanding with minus sign.

July	$
August	$
September	$
October	$
November	$
December	$

Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects.

Bowers' sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the companys current and debt ratios would vary during the year if all financial requirements were met with shortterm bank loans. Could changes in these ratios affect the firms ability to obtain bank credit? Explain.