Consider the following cash budgeting example for Buckeye Pharmaceutical Company:

Gross Sales by month:

• May 2010: $5,000
• June: $5,000
• July: $10,000
• August: $15,000
• September: $20,000
• October: $10,000
• November: $10,000
• December: $5,000
• January 2011: $10,000

After referring to the information provided, prepare a cash budget for the company for the period July to December 2010. All dollar amounts are in thousands.

All sales transactions are on credit, with historical data showing that 30% of current revenues are collected in the current month, 50% in the next month and 20% in the second month after sale. Assume that bad debt is negligible.

Except for supplies, assume that operating expenses are paid during the month they are incurred. Operating expenses (monthly unless indicated otherwise) for the period are as follows:

• Wages and salaries: $750
• Insurance: $250
• Depreciation: $300
• Other expenses: $3,000
• Taxes (paid in Sep. and Dec.): $500
• Payment for capital equipment in Oct.: $1,000

Supplies purchases in a month must equal 70% of the projected gross sales for the following month. Supplies are paid for in the month after purchase.

The corporation must maintain an ending cash balance of $3,500 each month and meets a cash shortfall through a short-term loan. (Ignore interest for purposes of this example.) For simplicity in this example, assume that excess cash remains as cash (i.e., is not reinvested). Assume that at the beginning of July, the company had a cash balance of $3,500 with no short-term loan outstanding.

5 6 Collections and Purchases Worksheet 7 1. Gross Sales 8 2. Collections 9 a. During month of sale b. First month after sale c. Second month after sale 2 3. Total Collections 4 4. Purchases (% of next month's sales) 5 5. Payments for Purchases 7 Cash Gains or Losses 8 6. Total collections 9 7. Purchases 20 8. Wages and salaries 21 9. Rent 22 10. Other expenses 23 11. Taxes 24 12. Payment for capital assets 25 13. Total payments 26 14. Net cash gain (loss) 27 28 Cash Surplus (Loan Requirement) 29 15. Cash at beginning with no borrowing 30 16. Collective case 1 17. Target cash balance (month end) 32 18. Cumulative case surplus (loan balance) 33 JAWN TO .3 67 May June July Aug Sep Nov Dec